Category Investments

Savvy investors can mitigate the impact of COVID-19 with tax savings

02 June 2020 Old Mutual Wealth

While the pandemic has hit global financial markets hard, astute investors can still use this time to make potentially significant tax savings in the long term.

In times of extreme market volatility, research shows that investors who stick to their long-term strategy come out best. But while staying the proverbial course, there are two compelling estate and tax planning opportunities that promise to protect the long-term wealth of astute investors.

This is according to Elbé Thatcher, Fiduciary Specialist at Old Mutual Wealth, who says “while the current market volatility due to COVID-19 presents numerous challenges to investment performance, there are some valuable tax planning opportunities that can soften the blow.”

The first is the trust, which despite it falling out of favour in 2017 after changes in regulation, continues to offer investors compelling advantages. “A trust remains a great way to secure the long-term financial stability of a family by offering continuity and asset protection. This is because the trust and any assets owned by the trust are unaffected by the death of a family member, making it a great tool for estate planning,” says Thatcher.

Thatcher explains that before March 2017, growth assets – such as fixed property and shares – could be transferred to a trust by way of an interest-free loan, which the trustees could pay off over time. With changes to Section 7C, this could no longer be the case, making the vehicle unattractive due to the added tax burden.

However, with the recent reduction in the repo rate, only loans to the trust over R2,1 million will attract donations tax (if the client has not utilised the annual R100,000 donation), thus making it an opportune time to transfer growth assets to the trust.

Furthermore, the fall in markets due to the COVID-19 pandemic has seen the value of share portfolios decline and therefore attracting lower capital gains tax (CGT).

“Because the CGT payable drops along with the value of your portfolio, it makes it a good time to think about transferring these assets into a trust. With the market recovery, the share portfolio – now owned by the trust – should increase to the benefit of the trust beneficiaries,” says Thatcher.

She says that the same principle can apply to offshore investments, which are subject to hefty taxes and estate duty. “Apart from the numerous other benefits, transferring your existing offshore share portfolio into a type of endowment known as an ‘offshore life wrapper’ can reduce tax and simplify the winding up of your estate,” says Thatcher.

“In normal circumstances, the transfer of offshore assets into this wrapper would trigger a CGT as it is considered a “deemed disposal”. However, doing so when global markets are at a low point, and the value of your portfolio is thus lower, means you pay less CGT than you otherwise would.”

When you consider that a 40 percent inheritance tax is payable on the value of share portfolios exceeding £325 000 in the UK, or $60 000 in the US, it becomes clear that an offshore life wrapper can save investors a lot of money in the long term.

“While investors would always do well to seek out professional advice for their unique circumstances, for those inclined to seize the moment, long-term tax savings could be the upside of market turmoil created by COVID-19,” concludes Thatcher.


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