South Africa Adviser
15 FEB, 2024
What keeps HNW individuals and their families
up at night
Advising HNWIs is a very complex area, with lots of balls in the air. You either need to have
the knowledge or be backed by someone to assist and partner with you.
BY ELEANOR BECKER
Advice to high-net worth individuals (HNWIs) is becoming more challenging ranging from a
complex tax and regulatory environment to intergenerational succession planning.
This is according to Albert Coetzee, head of the global investment platform at Ninety One.
Advisers’ interest has been growing in tax, estate planning, product structure and product
beneficiaries – mainly for HNWIs, said Coetzee in an interview with Citywire SA Adviser.
Ninety One started running regular masterclasses for independent financial advisers (IFAs)
in March 2020 and Coetzee shared some insights from these sessions on HNWIs and their
families’ major investment concerns are.
Externalising funds
HNWIs have been externalising funds offshore for some time and tend to do so regardless
of the rand exchange rate.
Coetzee said HNW families have become global families – with any number of family
members living overseas. It is thus vital that advisers first determine the client’s tax
residency status, as this determines product suitability.
If for example a non-tax resident client who emigrated to Australia many years ago kept an
offshore investment controlled by a South African nominee structure where the
investment’s held in the name of the nominee entity, but the client owns it and their
beneficiaries inherit it and that investment according to the legal opinion received by Ninety
One will be considered a South African asset in their local estate when they die, because of
the way the structure works. This complicates the winding up of the estate.
Financial emigration
HNWIs need to know how their retirement annuities, investment-linked living annuities and
discretionary investments will be affected if they break SA tax residency and become
residents elsewhere.
As of 1 March 2021, pre-retirement emigrants can only access their retirement benefits if
they can prove to the retirement fund that they have been non-resident for tax purposes for
an uninterrupted three years and if the South African Revenue Service (Sars) issued the
fund with an applicable tax directive. Also, capital gains tax (CGT), as well as other exit
taxes, may be payable when someone breaks their SA tax residency. Citywire SA Adviser
examined this here.
As an aside, HNWIs tend to be emigrating primarily to the Netherlands, Australia, New
Zealand, the US, Canada, the UK, Ireland and Portugal according to Coetzee.
For clients planning on emigrating in a few years’ time, Coetzee suggests that advisers avoid
restructuring their investments too far ahead of their emigration, as much can happen
before then, including the client’s death while they are still a SA tax resident.
‘I always say “when you’re still a tax resident in South Africa, your investments should suit
the SA tax and regulatory environment”.
‘Why expose the client today to situs tax (estate tax on assets in the UK or US levied by
either country), probate and so on – by investing in foreign entities, if they will still be a
South African tax resident for the next few years?’ he asked.
However, advisers need to consider the client’s future requirements and scenarios, so these
options are ready when the client’s circumstances change.
Intergenerational succession planning
Coetzee believes this is the most important [financial planning] point for financial advisors
dealing with HNW clients. An increasing problem for advisers is clients either leaving SA
themselves, or their clients’ children are living abroad, making succession discussions and
planning very difficult.
He said in his experience from speaking to advisers and dealing with requested proposals
and queries from IFAs related to HNW families, approximately 80% of local HNW clients
have at least one child living abroad.
There are several ways to tackle this. He said some advisers are building partnerships with
financial services entities overseas, especially the UK, that can assist them in serving their
clients once they emigrate. Others are studying for qualifications allowing them to advise
clients overseas, for example the UK CFP designation.
There are also offshore products available aimed at clients who are or will become non-tax
residents and wish to retain links to their South African adviser.
Fee aggregation
All clients (but especially HNW families) are sensitive to fees, and there is a move to price
families as one unit. Fee aggregation helps families to preserve more of their wealth for the
future because they save on fees, Coetzee explained.
Ninety One thus launched family pricing some time ago to reduce the administrative costs
of investments and help facilitate the successful transfer of wealth across generations, he
said. The Ninety One Family Office reflects a shift from a traditional adviser-client
relationship to a family advice approach.
Taxable income
Something many investors are not aware of until Sars comes knocking, is that the interest
gained in offshore bank accounts is taxable.
‘It’s staggering the amounts of money sitting in overseas bank accounts,’ said Coetzee,
adding that often advisers are not aware of these funds and therefore don’t have the full
picture of their client’s tax situation.
‘When you withdraw money from a bank account, there’s no CGT. So, there are options to
deal with that efficiently.
‘Let’s transfer that to an overseas money market fund, for example. Let’s package it in a
product structure which makes provision for primary and alternative beneficiary
nominations, avoids executor fees, probate and situs tax, and offers the possibility of paying
less income tax,’ said Coetzee.
‘Simpler is better on condition that the structure is correct,’ he added. Certain complicated
structures used to externalise money from SA – for example an overseas trust owning an
overseas company that invests the client’s money – can be very expensive when markets
don’t perform.
‘If you take into account situs tax, probate, CGT on death, dealing with the [local] Master’s
Office and executor’s fees, you can in some cases almost take a third of the value [of some
offshore funds] away.’
Beneficiaries of trusts
Following adjustments to The Trust Property Act given SA’s greylisting by FATF, reporting
requirements for trusts, trustees and beneficiaries are much more cumbersome and tax
punitive, Coetzee said.
South African trusts have thus become problematic to deal with, especially when the trusts
must distribute to foreign beneficiaries.
‘In the old days when I had money in a trust and I distributed it to a beneficiary, you could
still use the conduit principle, which meant there was no to limited tax in the trust. The
distribution would be taxed in the beneficiary’s hands, which was a lot less,’ he said.
‘[Sars] has [now] started to say especially if you distribute the funds in the trust to non-tax
residents, certain taxes must be dealt with in the trust first before it gets distributed to the
beneficiary. And where the non-resident beneficiary lives in Australia, for instance, that can
potentially … be taxed again in the hands of the beneficiary in Australia.
‘There’s a lot of money sitting in South African trusts and many beneficiaries are foreign or
non-residents. Ninety One is working [to find] ways around that to make this as tax efficient
as possible.’
However, Coetzee believes SA trusts can be extremely valuable in certain circumstances.
Regarding offshore trusts, usually clients pay money into it by lending it to the trust. But
high interest rates and rand weakness have made loan accounts to offshore trusts very
punitive.
‘That loan account sometimes can be more cumbersome than having the investment
upfront in your own name and paying estate duty on it,’ said Coetzee.
However, some HNWIs are becoming creative around this issue.
For example, he has seen that older clients are considering keeping their money and letting
the trust rather inherit from them on their death. ‘Suddenly there’s no loan accounts and
interest, as the offshore trusts inherited the investments from the deceased. In some
structures this can also be CGT neutral, assuming that the offshore trusts continue with the
investment once they become the owner,’ he said.
‘So, there’s still a place for offshore trusts … just build the puzzle differently,’ he said.
Illiquidity on death
HNWIs want to be able to invest discretionary funds that can be quickly available to their
heirs soon after their passing, without them having to deal with the Master’s Office, known
to be extremely inefficient.
As such, he said there is significant focus on products, product structure at Ninety One to
assist its IFAs, especially around beneficiary nominations.
Capital preservation and yield
Many HNWIs are entrepreneurs, focused on preserving capital. ‘Interesting things like
private equity and private credit come into play,’ said Coetzee, adding that HNWIs don’t
tend to be put off by their lock-in terms.
HNWIs also have what Coetzee called the ‘offshore wall of worry’ which includes CGT on
disposal; protection from death taxes; saving on executor fees; and flexible beneficiary
nomination options.
He added that today’s HNWIs are a lot more informed on their finances and options.
‘Advising HNWIs is a very complex area, with lots of balls in the air. You either need to have
the knowledge or be backed by someone to assist and partner with you,’ he said.
Would you like to receive our newsletter with dedicated content for advisers?
Sign up now
Related News
Advisers share their biggest challenges and learnings from 2023
Several SA asset managers took more money offshore in 2023
How and why emigrants should consider ‘divorcing’ Sars
Hope for the Master’s Office
South Africa Advisers
REGULATION
15 FEB, 2024
STORY BY ELEANOR BECKER
NHI Bill likely to face legal backlash if
signed into law
B4SA’s Martin Kingston says the bill does not pass constitutional muster.
15 FEB, 2024
What keeps HNW individuals and their families up at night
ADVISER VIEWS
15 FEB, 2024
Advisers share their professional and practice goals for 2024
ADVISER PROFILE
13 FEB, 2024
Wouter Fourie: A diligent planner at home and in work
REGULATION
13 FEB, 2024
FSP targeted in second online scam in a year
ADVISER PROFILE
13 FEB, 2024
Wealth managers, meet Andrew Clayton
Wealth managers, meet Andrew Clayton
MACROECONOMICS
08 FEB, 2024
Cape Town’s private wealth to boom – report
Read more