The Commissioner recently issued his findings in respect of private banking insurance wrappers by means of an Advanced Tax Ruling (ATR) on an off-shore private banking insurance wrapper.
What is a private banking insurance wrapper?
The concept could best be described as the integration of offshore assets into an insurance policy. The owner can transfer liquid assets such as shares, bonds, cash, mutual funds, structured products etc. into the insurance wrapper. The existing assets therefore do not have to be redeemed or switched into other investment vehicles, thereby saving the owner unnecessary costs. Current market conditions could make such a structure favourable, as many equity based portfolios carry an unrealised loss. The investor retains his custodian bank (provided it forms part of one of the approved banks within the network); he/she retains the asset manager as well as his/her investment strategy.
How is SARS going to tax the structure?
The specific ruling is as follows:
• No amounts are received by or accrue to the policyholder for purposes of the “gross income” definition in Section 1 of the Act in respect of the policy prior to it being surrendered.
• Section 7(1) is not applicable to the policy during the existence of the policy thus the income accrued within the policy is not deemed to accrue to the policyholder.
• The surrender of the policy, in whole or part, will result in the disposal of capital assets by the policyholder, and the proceeds from such disposal for purposes of Para 35 will be the surrender value of the policy.
• The termination of the policy as a result of the relevant insured event transpiring will result in a disposal in the hands of the policyholder. As such, the policyholder will realise a capital gain/loss.
This means that an SA tax resident could switch from his marginal income tax rate to a maximum CGT rate of 10%, if he integrates his assets into the offshore life wrapper. There are no taxes payable on interest, dividends and capital growth etc. Provided the assets remain in the structure. CGT will only apply upon withdrawal or termination of the wrapper.
Due to the calculation formula issued by SARS for the determination of CGT on foreign policies, most investors will probably carry an effective tax rate less than 10%. It also needs to be noted that such tax savings do not only apply to South Africa, but also to other tax jurisdictions, i.e. individuals that are liable for taxes in the USA, UK, Germany, Italy, Spain and Scandinavia can also use this structure.
Which institutions are involved?
The insurance platform is provided by an insurance company in Liechtenstein and the custodian bank should be based in Switzerland. In order to retain the tax advantages as per the ATR, the investor needs a foreign asset manager, either at the custodian bank or an independent advisor abroad.
What are the risks involved – how secure is the wrapper?
The assets are legally protected and cannot be touched by creditors, plaintiffs, insolvency, governments etc.
Other security considerations are that the insurance company has the assets segregated from its balance sheet. The default of the insurance company therefore has no effect on the wrapped assets.The custodian bank does not own the assets either, and the funds remain in the investor’s name on behalf of the policy with the insurer. The asset manager has a restricted power of attorney and cannot withdraw or transfer any funds. Only client instructions for withdrawals are accepted.The only risk remaining is the investment risk, which the owner of the assets determines within his/her investment strategy together with his/her asset manager.
Who could benefit from this structure?
The following categories of investors can benefit:
• Investors that are liable for tax either in South Africa, Germany, UK, United States, Spain, Scandinavia or Italy.
• Investors that would like to minimise their worldwide tax liability, being tax residents in multiple tax jurisdictions.
• South African investors with funds abroad or those planning to make use of their offshore allowance.
• SA tax residents that have made use of the tax amnesty and would like a simplified tax return.
• Investors with succession and international tax planning needs, because beneficiaries of the estate are situated in different tax jurisdictions.
• Persons thinking of immigrating to South Africa: They should arrange their financial matters before becoming a tax resident in South Africa.
The following aspects should be considered:
• Because Swiss Banking and Liechtenstein Insurance Secrecy Laws apply, the assets are held safely and confidentially.
• The structure is very flexible with unrestricted access: there is no minimum contract term, so regular or ad-hoc withdrawals can be structured free of tax (and charges) and there are no surrender penalties.
• Compared to traditional structures such as Trusts, “Stiftungen” and offshore companies, the insurance wrapper is not exposed to anti-tax avoidance rules (Section 7, Para 70 and 72 of 8th schedule) and anti-estate duty provisions.
• There is no need to have a separate will in Switzerland, as the policy makes provision for direct beneficiary nominations.
What costs are involved?
There are three tiers of transparent costs:
• Insurance fees: There is an initial fee to set up the structure (analysis and recommendation, opening of bank account, transfer of assets and issuing of policy), an ongoing fee.
• Asset manager fees and bank charges: As per the investor’s own arrangements with his custodian bank.
Larger amounts benefit from very low charges.
Tony Hug, BCom, CFP, IMM, CEA, is Director at Swiss Financial Consulting.