People hold cash for various reasons, but primarily for its liquidity – the ease with which it can be accessed and used for immediate needs or unexpected expenses. This is particularly true when considering offshore holdings, where individuals might keep funds readily available for international transactions, potential opportunities, or simply as a perceived safe haven. Various factors can lead to sub-optimal outcomes when holding cash in offshore bank accounts. These are taxes such as situs and probate, which can erode the perceived benefits of simply holding liquid funds offshore.

One of the most significant drawbacks for South African residents holding cash directly in an offshore bank account is the punitive taxation.

For higher-rate taxpayers, 45% of the interest earned can be lost to tax annually.

See the below illustration:

Tax-efficiency could be achieved by investing in “roll-up” funds. In these funds, all income is reinvested and rolls up into the fund’s price, effectively converting what would typically be an income event into a capital event. Capital gains are taxed at a lower rate than income. For the highest tax paying bracket, the effective capital gains tax is 18%. Furthermore, the taxation of these capital gains is deferred until the investor disposes of their units, providing greater control over the timing of tax payments. The below illustrates the use of a roll-up fund assuming a full redemption of the yield. As a side note: typically one would not redeem the yield but rather leave it until required. As these taxes are not due until disposal, the compounding of deferred taxes adds to the efficiency and benefit.

**Return rate reduced by 0,65% to account for income fund fees

There are further estate and tax efficiencies when using a wrapper, also referred to as an endowment or sinking fund. By pairing a roll-up fund with an offshore policy wrapper, the effective rate of capital gains tax (CGT) is fixed at 12% upon disposal. This creates a tax arbitrage opportunity for higher-rate taxpayers who would otherwise pay 18% tax on capital gains. While the overall yield is marginally reduced due to wrapper fees, the main benefit is that all tax is settled within the endowment structure, leaving the client’s personal tax profile unaffected. This is especially advantageous during retirement, when managing a client’s tax position is crucial. The following section provides an example of a roll-up fund within a wrapper:

**Return rate reduced by 1,00% to account for wrapper and income fund fees

An additional aspect of holding cash offshore is the estate administration process that takes place on death. Upon the death of an investor with funds held in an offshore bank account, the process of dealing with these assets can be complex and expensive. It may necessitate offshore probate and the engagement of a foreign agent, similar to a South African executor, to handle the affairs related to the bank account. This process can be time-consuming and financially burdensome, and the funds in the foreign bank account will typically be frozen while the estate is being finalised, preventing the deceased’s family from accessing them. Wrappers are not subject to probate by allowing for beneficiary nomination and bypassing the complexities of offshore estate administration as well as local executor’s fees (4,025% incl. VAT).

Owning assets in foreign jurisdictions like the UK and US can trigger tax liabilities in those countries based on situs (legal location). This includes estate tax, known as inheritance tax (IHT) in the UK and federal estate tax (FET) in the US. South African investors may mitigate the risk of their assets being subject to foreign inheritance taxes based on the situs of a bank account in a particular jurisdiction by using a wrapper. Wrappers provide investors with protection against situs taxes on assets held within the United Kingdom and the United States. See the below illustration showing the estate efficiency of a wrapper:

The wrapper solution comes with many benefits as detailed above. This is specific to each client, requiring an assessment that there is sufficient estate liquidity, given the wrapper is administered outside of the estate. This is where your financial advisor can play a critical role in helping plan for estate purposes.

When viewed holistically, not only from an income perspective but also from an estate planning and intergenerational wealth transfer standpoint, the wrapper solution emerges as the most efficient and robust option.

The comparison clearly shows that, despite slightly lower annual yields, the total value preserved for beneficiaries is substantially higher when offshore assets are held within a wrapped roll-up structure.

In summary, for South African investors holding meaningful offshore cash balances, the most efficient solution is typically not to remain in cash, but to adopt a well-structured offshore strategy that balances liquidity needs with tax efficiency, estate protection, and long-term wealth preservation.