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5 Ways to Lower Your Capital Gains Tax in South Africa

5 Ways to Lower Your Capital Gains Tax in South Africa

5 Ways to Lower Your Capital Gains Tax in South Africa
5 Ways to Lower Your Capital Gains Tax in South Africa

 

In South Africa, capital gains tax is levied on the difference between the amount you sell your assets for and what you paid to acquire them. Understanding how capital gains tax works is essential to planning, and limiting its impact on your finances is critical. Thankfully, South Africa has several ways to lower your capital gains tax bill. Let’s take a look at some of them.

Property Investment Strategies to Keep in Mind

If you’re looking to lower your capital gains tax bill, you should first consider how you can earn extra income. A property investment can be a great source of passive income but comes with some serious risks. Before diving in head-first, review the risks and rewards of investing in property to understand the pros and cons better. If you don’t want to take on the dangers of property investment, there are other strategies you can use to lower your capital gains tax bill. You can diversify your holdings to reduce the risk of one investment negatively impacting your overall wealth. For example, diversify your investments across asset classes such as agriculture, financial services, and real estate. This will help lower your overall investment risk.

Lower Your Capital Gains Tax in South Africa By Diversifying Your Holdings

Diversifying your holdings means putting your money into various investments rather than allocating a majority of it to just one. This reduces the risk of one investment negatively affecting others. There are several ways you can diversify your holdings. You can invest in several asset classes, such as financial services, real estate, and agriculture. This will help to lower your overall investment risk and make your wealth less vulnerable to one particular investment.

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Lower Your Capital Gains Tax in South Africa with Dividend Reinvestment Plan (D.R.P.)

Dividend reinvestment plans (D.R.P.) allow you to “re-invest” the dividends paid on your investment shares. This means you don’t have to pay any tax on the money you “sweep” from the claims at the current share price. In most cases, the share price will have increased since you acquired the shares. Therefore, you pay less tax on the amount you “sweep” than you would if you were to take the money as cash.

What’s a Unit Trust?

A unit trust is a collection of investments you can buy as a single investment. This way, you can invest less money and reduce your overall investment risk while benefiting from a diversified portfolio of assets. A unit trust is like a mutual fund sold as a single investment. You can buy a unit trust by paying a fixed amount (unit) equal to the amount you want to invest. The money you “put in” comes “out” as income through the share price of the investments that the unit trust holds. Therefore, you don’t have to be concerned about the risk of one investment negatively impacting your overall wealth. The unit trust is a great way to keep your capital gains tax bill low.

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Register as a Company and Invest through a Share Trading Account

If you would instead not invest through a unit trust or you have a large amount of money to invest, you can also create a company and support through a share trading account. This is a great way to keep your capital gains tax bill low. Investing through a share trading account means you won’t have to pay any capital gains tax on the money you “sweep” from the account at the current share price. The share price will have increased since you acquired the shares. Therefore, you pay less tax on the amount you “sweep” than you would if you were to take the money as cash. There are several share trading account providers in South Africa. You can decide which is right for you based on the fees they charge, the options they offer, and the security of the funds they hold. If you don’t want to take the time to research different share trading account providers, you can choose a large brokerage like Investec or F.N.B. Securities that charges a standard brokerage fee. The standard brokerage fee will be high enough to cover the cost of trading on your behalf, but it’s not so high that it would benefit the brokerage company at your expense.

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Lower Your Capital Gains Tax in South Africa via an Exchange Fund and B.V.I. Account

If you’d like to lower your capital gains tax bill even more, you can open an exchange-traded fund (ETF) or a business trust account in a foreign jurisdiction such as the British Virgin Islands (B.V.I.). An ETF is like a share trading account that collects different investment assets, such as shares, commodities, and currencies. A business trust is similar to an investment fund that you can hold as a single asset. It’s a great way to keep your capital gains tax bill low because the B.V.I. business trust lacks the same tax exposure as a South African corporation.

Summary

If you would like to lower your capital gains tax bill, you can diversify your holdings, invest through a share trading account, open a foreign share trading account, or invest through an exchange-traded fund. A foreign share trading account or an investment fund from a foreign jurisdiction will help you to keep your capital gains tax bill as low as possible.

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