If you’re a high-net-worth individual (HNWI), you’ll be interested in the best ways to achieve additional returns on your investments and savings. Your wealth management strategies will no doubt focus on getting the best investment returns, but often these are as much to do with reducing tax and costs as they are with high yields.
When it comes to tax, a strategic investment approach is essential. What are the most efficient ways to manage this beyond the obvious tax-free savings vehicles available?
Tax-efficient investment vehicles
There are various investment vehicles with tax benefits available in South Africa:
- Tax-free investments (TFIs): These allow tax-free growth on contributions up to R36,000 per tax year (with a lifetime limit of R500,000). TFIs are not liable for tax on any returns, including interest, dividends, and capital gains, and they can hold various financial instruments, including cash, stocks, bonds, and unit trusts. It is important not to exceed the annual and lifetime investment limits to avoid heavy tax penalties during your annual tax assessment.
- Retirement funds: These can be retirement annuities (RAs), pension funds, or provident funds. Contributions to retirement funds are tax-deductible, capped at 27.5% of taxable income (or R350,000 a year, if 27.5% of your taxable income exceeds that amount). During the investment period, no income tax, capital gains tax, or dividends withholding tax is payable on investment returns. Upon retirement, two-thirds of the retirement interest must be used to buy annuities that will pay you a regular pension or annuity, subject to your individual marginal tax rate. RAs are particularly popular long-term investment vehicles, designed to help you save for retirement while enjoying certain tax benefits. RA contributions are deductible up to certain limits and have tax-deferred growth while you contribute.
- Unit trusts and exchange traded funds: These are popular investment vehicles in South Africa, as they offer diversified exposure to various asset classes, both local and international. They are tax-efficient because they defer capital gains and optimise foreign dividends, withholding taxes, and situs taxes, though this also depends on the risk profile of the fund or trust. Always consult your broker or investment adviser on the amount of risk you are exposed to if you’re unsure.
Tax regimes and responsibilities can be complicated when you have a sizeable investment portfolio
Offshore vs local investment
If you have an extensive portfolio outside of unit trusts (which are usually managed by a fund manager on your behalf), you’ll have considered how much offshore investment exposure you might want. Diversifying your portfolio is often a wise course of action, but what are some of the tax implications?
- Rand-denominated offshore unit trust
These are often offered by local fund managers. The key benefit is that when you invest in rands, you don’t require a tax clearance certificate and don’t have to manage foreign exchange regulations, since this is done by the fund. However, you’ll be liable for capital gains on your original rand investment, and you will be taxed on interest and dividends.
Dividends earned from local companies attract dividends withholding tax, but this is automatically withheld, so you have no further obligations once you receive a net dividend. The feeder fund manager selects suitably located offshore funds in the best jurisdictions to optimise foreign dividends, withholding taxes, and situs taxes.
The actual tax you pay on interest from these investments depends on your own marginal income tax rate and the type and amount of investment income and capital gains you earn from your investments. The higher your marginal income tax rate, the more tax you will pay. Individual taxpayers do, however, enjoy an annual exemption on all South African interest income they earn. This exemption is set by the South African Revenue Service every year, but it has remained unchanged for several years. For the 2025 tax year, it’s set at R23,800 for individuals under 65 and R34,500 for those aged 65 and older.
- Foreign investments in foreign currency
If you invest directly with a foreign fund manager or through an offshore investment platform, you will pay capital gains tax on all gains calculated in fund currency – in other words, you will not pay tax on the rand fluctuations against the fund currency. You’ll pay tax on interest at your individual marginal income tax rate, and on foreign dividends at an effective rate of 20%. Your fund manager must select the suitably located offshore funds in the best jurisdictions to optimise foreign dividends, withholding taxes, and situs taxes. If you use foreign currency to invest in foreign funds, you can take up to R1 million offshore a year without having to apply for a tax clearance certificate.
Since South Africa uses a residency-based tax system, South African residents must pay tax in South Africa on income from anywhere else in the world. If tax on the interest or foreign dividends on your investments is deducted in the foreign currency, you will be granted tax credits of foreign taxes paid against South Africa tax, subject to certain limits – so you will not be subject to double taxation. If you’re earning dividends from a foreign company in which you own more than 10% of its equity, you are exempt from tax.
Capital gains tax considerations
Capital gains tax applies only if you decide to sell all or part of your investments. If those investments have risen in value since you bought them, you are taxed on 40% of the positive difference in value, which will be included in your annual taxable income. Since you are an HNWI, you are likely to be taxed at the maximum marginal tax rate of 45%, which makes your effective capital gains tax rate 18%, with an annual exclusion of R40,000.
Tax regimes and responsibilities can be complicated when you have a sizeable investment portfolio as an HNWI. It’s always wise to seek professional advice.