The essential role of offshore trusts when repatriating wealth from abroad

According to Stats SA’s 2023 migration profile report, there has been a noticeable increase in the number of South Africans returning home in recent years, often after years of living abroad, particularly coming from countries like the United Kingdom, Australia and the United States.

Leah Mannie, pensions and business development manager at Sovereign Trust (South Africa), says the bulk of these returnees are skilled professionals and recent retirees, together with their families, who initially left South Africa to seek better opportunities overseas.

“It is difficult to pinpoint the number of people returning, or any single factor behind the migration, but drivers seem to include the impact of the pandemic, changes in global mobility, evolving economic opportunities and a desire for family reunification.”

What is certain for those considering repatriation is the importance of planning ahead to ensure a smooth and efficient transition – especially when it comes to optimising the tax implications of bringing money back into the country and managing and protecting assets.

South Africa operates a residence-based taxation system, meaning tax residents are taxed on their worldwide income, regardless of where that income is earned.

There are two main criteria for determining tax residency: the ‘ordinarily resident’ test and the ‘physical presence’ test. If South Africans returning from abroad meet these tests, they will be taxed on both their local and foreign income.

“This has significant implications for South Africans who have earned income abroad, making it essential to explore available strategies to minimise their tax liabilities. Placing overseas assets in a well-structured offshore trust can be a highly effective way to shield against potential exposure on capital gains and estate duty,” says Mannie.

The benefits of offshore trusts include:

• Tax efficiency: Offshore trusts are a reliable vehicle for the reduction or elimination of various taxes including estate duty, income tax and capital gains tax.
• Succession planning: Offshore trusts are useful for those with significant wealth or complex estates, especially where they include assets that have been built abroad. A trust can help ensure wealth is passed on to beneficiaries in a tax-efficient manner, and help avoid lengthy probate processes.
• Asset protection: Offshore trusts provide a buffer against the effects of political and economic instability. In South Africa, where there are ongoing concerns about security and the stability of the economy, this protection can be invaluable.
• Legacy: Offshore trusts can ensure wealth accumulated over a lifetime is not dissipated or divided up, but is preserved as one fund. When properly protected, such funds can continue to grow in value, while making provision for payments to beneficiaries as required and at the same time preserving capital for future generations.
• Protecting beneficiaries who are unable to manage independently: A trust allows the settlor to provide for those who may be unable to manage their own affairs, such as minor children, the elderly and people suffering from certain illnesses.
• Privacy: Because the assets and the beneficiaries of trusts do not need to be publicly disclosed, these structures offer a high level of confidentiality that can be particularly appealing for individuals who wish to maintain discretion regarding their wealth.
• Access to assets: Unlike personal estates, where assets may be frozen during the finalisation of a deceased estate, offshore trusts always remain accessible. This ensures heirs can retrieve their inheritance without unnecessary hardship and delays.

Mannie emphasises that, while offshore trusts offer numerous benefits, it is essential to work with qualified legal and tax professionals to ensure full compliance with both South African and international laws.

“For South Africans considering a return after having lived abroad, professional advice is crucial for navigating the complexities of local tax laws and ensuring assets are structured in the most efficient way possible.”