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Invest in variety to supplement your income

Investing a windfall

I HAVE inherited R350 000 and need investment advice.

I would like to augment my husband's planning for our old age either by added insurance, an annuity or a more permanent investment.

I am contemplating a semi-permanent investment which should be available for unplanned expenses.

A part of the inheritance should be available immediately.

We are in our fifties and I'm working half-days, earning around R2 000 a month. We don't have serious financial commitments at present.

I would naturally like to avoid being taxed unnecessarily.

Bryan Hirsch of The Pride Group replies: Your investment decisions should be made on minimal risk, the potential for capital growth and a high after-tax return, or a combination of the three. My recommendations are confined to investments that meet these criteria.

Cash on call of R50 000. This should be invested in a money market account to be used for contingencies and unexpected expenses.

Matured endowment policy worth R150 000. The advantage of purchasing this type of policy is that it is an endowment policy that has already been in existence for a minimum of 5 years. This means that the investor has a number of tax-free options available.

You can allow this policy to continue growing, earning tax-free income. You can also make periodic withdrawals from it, and reinvest funds into it.

As all withdrawals from the policy are tax free, you would in fact own an asset from which you could get tax-free income.

Linked unit trusts worth R150 000. This plan allows you to invest your money into a range of unit trusts, with or without the benefit of rand cost averaging. You can switch at any time, should the funds that you originally chose not achieve a satisfactory performance.

You will need the services of a financial adviser, however, to help you choose funds and tell you when it is necessary to switch funds.

Another advantage of this investment is that you can make withdrawals from the plan in line with your financial requirements, meaning you will be able to supplement your income from this plan should you need to.

The withdrawals from linked unit trusts are tax free. There should also be growth on the investment - over the past five years unit trusts have grown in excess of 15% a year.

Taxing questions

I FOUND the information on blocked rand funds in a recent Rands and Sense column very helpful. But could you please explain the tax implications on interest and dividend income received from blocked rands by an emigrant.

How much interest can be transferred a year, without tax being levied, from a blocked account held in SA to a British citizen who has returned to the UK and needs additional income? (Can dividend income be transferred tax free?)

If interest - more than the threshold value - is transferred, at what rate is tax levied?

Daniel Macqueen of Falcon International Financial Services replies: There is a distinct difference between exchange control regulations and the Income Tax Act in SA.

The first regulates the flow of money into and particularly out of the country, while the other seeks to impose taxes on earnings of income within SA. Income tax in SA is not necessarily levied on payments abroad.

The maximum income that may be transferred to a former resident (the emigrant) from the person's blocked rand account in South Africa is currently R300 000 per calendar year. Any unused income that could have been transferred, but is not, is lost. These limits are occasionally relaxed under certain circumstances, particularly in cases of ill health. If income is taxable, it will have to be taxed before being paid abroad. At present, dividends are not taxable in SA and non-residents are exempt from taxation of interest income.

However, should you retire to the UK, you will almost undoubtedly become a taxpayer in that jurisdiction and be liable to taxation on a worldwide basis.

Fortunately the UK inland revenue will allow a rebate of taxation paid elsewhere on the same income, if this applies.

Since the income you refer to seems to be interest and dividends, which are taxable in the UK, you may be liable for income tax there instead.

Furthermore, as a returning British subject, you may require domicility immediately you return to the UK.

If you are domiciled in the UK, you are liable for inheritance tax (a death duty) and this may result in your worldwide estate becoming taxable on the death of the last surviving spouse.

Inheritance tax is often described as a "voluntary tax" since it can so easily be avoided through simple planning. Consider taking competent tax advice as soon as possible if your worldwide estate, including what you may have to leave in SA, amounts to more than £215 000 (roughly R1.6-million) at present. The sooner action is taken before you return to the UK the less unnecessary tax needs to be paid.

Since interest income earned by a non-resident is not taxed in SA, there is no threshold for tax reasons.

Remember that the Income Tax Act in SA is constantly under review and what is not taxable at the moment may be so in years to come. If you emigrate and leave blocked rand assets in SA, be sure to keep in touch with a competent professional in this country who will be able to advise on the correct course of action when there are any changes that may affect you.

ý We regret no personal correspondence can be entered into. The Sunday Times accepts no responsibility for the advice given in BT Money.