Estate duty is payable on the estate of every person who dies and whose net estate is in excess of R3.5 million. Estate duty is charged at a rate of 20%. For those individuals with estates over the value of R30 million estate duty was recently changed to 25%.
Estate Duty comprises the total of all the property (fixed property, business interest and investments) and deemed property (life insurance policies) of an individual less certain deductions.
Below is a basic illustration of an Estate Duty calculation:
The most common deductions are a Section 4A abatement and the Section 4(q) deduction.
The Section 4A abatement allows for an amount of R3.5 million to be deducted from the net estate of a deceased person.
The Section 4(q) deduction provides that any property that accrues to a spouse is deductible from the Estate Duty calculation. Most spouses typically leave their estates to their spouse. This creates a largely inflated estate for the surviving spouse and merely postpones the tax for when the surviving spouse passes away.
Momentum have introduced a Last survivor death benefit where the two lives are assured at the outset of the policy. Upon the death of the first assured life the future premiums are waived. Once the second life assured passes away the benefit is paid into the estate.
The advantage of this type of a policy is that it provides for liquidity in the deceased’s estate and allows for the beneficiaries to not have to sell assets to pay the tax liability.
The Last survivor death benefit is typically a quarter of the price of traditional life insurance, so this is an excellent way to mitigate against the cost of death taxes.
For more information regarding the Last survivor death benefit you can contact Kevin or Greg on 0027 41 373 0601.
Over the past year we have been presenting the case for investing offshore.
Whilst there is a renewed optimism in South Africa, this optimism may be ephemeral. South Africa has not structurally changed! State Owned Enterprises remain a challenge to the government and there has been little change in their financial positions. The land question is problematic and clearly won’t go away; creating further political and economic instability!
Over the past twenty years the South African Rand has been volatile and has declined by +/- 6% per annum.
The current exchange rate is around US$1 = +/- R12.60. So in essence the South African rand is 15% to 20% cheaper than it was during 2016 and 2017 but strangely investors are not as keen to invest offshore as they were when the rand was more expensive! How bizarre! Isn’t investment behaviour perverse? We are even hearing silly comments like “I’ll wait till the rand is R11 to the US dollar or R10 to the dollar!” Of course we have no idea what is going to happen to the price of the Rand. It may very well trade at these levels but at 15 to 20% cheaper isn’t this a great opportunity to be investing offshore for investors with a longer term horizon.
Over the past three years the Johannesburg Stock Exchange All Share Index has performed poorly and only achieved an annualised return of 1.81 %. This has not been a great return bearing in mind the amount of risk associated with investments in shares. Most fund managers are finding better investment opportunities offshore!
Investing offshore allows for diversification benefits, reduced emerging market and currency risk and the maintenance of hard currency spending power.
South Africa represents less than 1% of the world economy. Investing offshore allows investors to spread their investment risk across different economies and regions. It also provides access to industries and companies that may not be available in South Africa. There are numerous other countries that provide diversity and great investment opportunities.
All I all we believe there is a strong case for investing offshore for investors with a medium to long term horizon. Contact us for more information on offshore investing. We are able to provide exciting investments opportunities in US Dollars, Sterling, Euro and Australian Dollars.
Allan Gray reduce the minimum investment requirements
Allan Gray is reducing their minimum investment amounts on their offshore platform from 16th April 2018 making it easier for South African investors to invest in to their attractive range of funds.
Income withdrawals on Living annuities
In July 2017 we discussed the income withdrawal on living annuities and that investors are generally withdrawing unsustainable income from their living annuities. The poor annualised returns of 1.81% on the Johannesburg Stock Exchange All Share Index over the past three years have highlighted the income withdrawal problem and it is therefore worth repeating our 2017 newsletter article.
The major problem is that most investors have not saved enough money for retirement and are therefore forced to withdraw a higher income than that which is prudent. Ultimately this makes their long term chance of investment success unlikely.
According to Marriott Income Specialists:
“Market data for South Africa going back to 1900 has shown that the “safe max” income drawdown within a living annuity strategy is 4% p.a.
Given the above and the possibility of below average returns over the next decade, living annuity strategies in South Africa could be put to the test. Higher returns of the past have masked the impact of investors drawing too much income and eroding their capital, and it has only been the last two years that we have seen the impact of lower returns on living annuity strategies.
In our view, a fail-safe option for drawing an annuity income in this uncertain environment is to ‘spend the income, not the capital’ and this can be achieved by creating a portfolio of funds that produce a net income yield (after fees) that is as close as possible to the annuity yield drawn. This will ensure than an investor’s annuity income is funded by the income produced by the investment, and not from the underlying capital base.
The Perpetual Annuity (Marriott’s living annuity) enables investors to match their annuity income requirements to the income produced from the underlying investments, thus ensuring capital and future income streams are preserved into perpetuity.”
Investors will probably need to re-think about the amount of income that they are withdrawing from their living annuities. The magic withdrawal number is 4% per annum. Anything higher than this may lead to the investment failing in the longer term!
On 13th February 2018 the Registrar for Financial Services Providers issued a licence to Kevin Mills Financial Services cc to provide advisory and intermediary services for licence category 1.8 “Securities and Instruments: Shares.”
This brings an exciting opportunity for Kevin Mills Financial Services to add discretionary and non- discretionary share portfolios to our wide range of investment products. The share portfolios will offer the following benefits:
A choice of share portfolios within both the South African market and share portfolios offshore.
The portfolios will be structured according to the unique needs of each individual investor.
Transparency of fees and underlying investment holdings.
The share portfolios may be included in living annuity portfolios.
Kevin Mills Financial Services will actively seek out exceptional portfolio managers to assist in creating a wide range of diversified investment options.
For more information please give is a call.
Budget 2018:
An important change that was brought in during the recent budget was an immediate amendment to Regulation 28 of the Pension Funds Act relating to the asset allocation limits. As a result of the changes retirement funds can now have a maximum offshore exposure of 30% and a 10% exposure to Africa.
This change will allow for fund managers, such as Allan Gray, Coronation and Investec to take a greater amount of your funds offshore in your retirement savings funds.
Allan Gray have provided a handy two page document that highlights some of the changes that may affect investors. Please find this document attached.
Tax Certificates:
Please note that all Product providers will be sending out tax certificates in the next few months. If you do not receive yours please contact the office and we will be able to assist you.
