One way rich South Africans protect their wealth and pay less tax
Rich South Africans are increasingly taking advantage of offshore investing to protect their wealth and to pay less tax.
This is according to Dino Zuccollo, head of investor solutions at Westbrooke Alternative Asset Management, who said that while South Africans have been moving money offshore for years, the urgency has accelerated.
“Over the course of the last pretty long while now, there have been increasing levels of concern amongst South Africans around the degree to which we are invested locally,” he explained.
“We as South Africa are less than 1% of total global market capitalisation, and yet most South Africans have more than 50% of their wealth invested in this country.”
According to Zuccollo, more money is leaving South Africa each year through allowances that let investors externalise up to R11 million annually. But once offshore, the money often lands in low-yielding accounts.
“In a bank account in pounds, you’re earning probably less than 2%. In a fixed deposit account with maybe a 6-month notice, you’re earning 3 to 3.5%, with UK inflation at 3.8%,” he noted.
“Externalising is great, but once the money goes offshore, you need to invest in such a way as not to lose that money and to keep up with inflation. And that is where South Africans have found it challetanging.”
Most investors naturally turn to equities, but Zuccollo warned against concentrating entirely in volatile markets.
“Conventional wisdom would suggest that you should never invest 100% of your wealth into high-risk equities that bounce around all the time,” he said.
“If you don’t want to run material capital loss risk, but you still want to make a return, your options are limited, especially if you’re on the other side of the world, but you live here in South Africa.”
“It’s very difficult to get access, and that’s something Westbrooke is working really hard to change.” One alternative is private debt, where private lenders, rather than banks, make loans.
Tax benefits
Zuccollo explained that after the 2008 financial crisis, regulations made lending more expensive for banks, pushing them toward larger loans of around R500 million.
“That dearth or gap in the market is increasingly being filled by private lenders. A private credit fund takes investors and locks them in for a period of time, but the advantage is that, as a non-bank lender, you can be quicker, better, faster,” he said.
“You can provide smaller loans with greater complexity, quicker, and fill a need for entrepreneurs.”
The trade-off is liquidity. “They are less liquid, and that is the key drawback to alternative investments,” Zuccollo admitted.
For instance, Westbrooke’s UK Yield Plus Fund has a seven-year track record and £180 million under management, but investors must give six months’ notice to withdraw.
The payoff, however, is higher returns. “Where in a six-month fixed deposit you’d be getting 3 to 3.5%, in Yield Plus you’re getting 7 to 8, he said.
And because we are private market managers, he added that you can get cleverer with things like taxes.
“When you incorporate tax, we can generate for a client a return that is up to three times the post-tax amount that you’d be getting in the more traditional structures.”
Zuccollo stressed the importance of financial advice, saying the old 60/40 split between equities and bonds is outdated.
“It doesn’t work anymore, and that’s because the correlation between equities and bonds has become very strongly positive,” he said.
Instead, more advisors are advocating for allocations that include alternatives, such as 30%.
“Alternatives come with more complexity, more risk, and liquidity as a downside, but if you have a really high-quality wealth advisor, they’ll already be talking to us and will be well equipped to give you the advice you need to future-proof your portfolio.”
The appeal of alternatives is that they are less exposed to global shocks. “You might be invested in a property stock in the United States, and a war breaks out in the Middle East, and suddenly, the valuation of your investment moves,” he explained.
“That may or may not have anything to do with the fundamentals. One of the beauties of alternatives is that your return is much more closely linked to the fortunes of that investment or that property on that street, in that area.”
Ultimately, he argued that wealthy South Africans can reduce tax burdens and improve post-tax returns by using offshore private market strategies.
“If you can find a good asset manager who ticks all the boxes—financially aligned, with a long track record, who you can trust—you can take away some of the systemic risk and get a return profile much more linked to the quality of your asset manager,” Zuccollo said.
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