Be “tax savvy” with your investments

There are several instruments besides tax-free savings plans and retirement annuity funds in which investors can invest (or “save”). Examples are unit trusts and listed shares that are traded on a stock exchange. Where savings are invested with a long-term investment horizon there is usually significant growth potential in the value of the investment. Therefore two types of tax need to be reckoned with, namely capital gains tax (CGT) and estate duty (ED). CGT is payable when an investment is disposed of at a profit, while ED is payable on the value of the assets possessed by an individual at the time of death.

Here are two tips for managing your investments in a “tax savvy” manner.

1. Consider founding a trust

Transfer of growth assets to a trust can be highly beneficial from an estate and tax planning perspective.

• Should you die you are not deemed to own the growth assets as they form part of the trust assets. This means that further growth in the value of the assets vests in the trust and that CGT only becomes payable when the trust disposes of the assets and not at your death.
• Because further growth in the market value of the assets vests in the trust this will also not contribute to the taxable value of your estate.
• Additional assets, limited to R100 000 per annum, can be donated to your trust tax-free.
• Should the trust assets be sold by the trust in future, the capital gains can be distributed to the beneficiaries of the trust in terms of current legislation. All beneficiaries who benefit from the distribution of the capital gains will share in the CGT liability.
• Viewed in terms of risk management, the transfer of assets to a trust can offer your assets protection from the claims of creditors.

The sooner restructuring is attended to, the better. Although capital gains above R30 000 will be subject to CGT when assets are transferred to the trust, this is a small price to pay compared to the exponentially higher future tax liabilities that the estate will incur when the owner dies.

2. Buy your residence in your own name

• Capital gains up to a maximum of R2 million are exempt from CGT if an individual owns his primary residence.
• Bear in mind that the market value of this property contributes to the taxable value of your estate.

The information provided above should not be considered in isolation. It should, however, be considered as part of an overarching and comprehensive estate planning strategy.

Please contact your relationship director or Danie van Zyl at danie@asl.co.za or 021 840 1600  should you require more information in this regard.