Tax free wealth creation with property funds

By Liliane Barnard, CEO and Portfolio Manager at Metope Investment Managers, and Aimee Glisson, Director: Operations, Performance & Risk at Metope Investment Managers

The tax year, along with the deadline for an investor’s maximum R36 000 annual tax-free savings account contribution, comes to an end on the 28 February 2021. Investors are likely reviewing the key question of where best to allocate their remaining annual tax-free allowance. Moreover, plans regarding the allocation of the subsequent year’s tax-free allowance are likely in motion.

Liliane Barnard

A Tax-Free Savings Account (TFSA) is an apt choice for investors with a long-term investment horizon and wanting to utilize tax efficient strategies. With either a lump sum investment of R36 000 or a series of regular investments into a TFSA, an investor exposes their capital to a tax-free environment – no tax on interest, dividends nor capital gains. These tax benefits, offered by SARS, when compounded over time, result in large investment gains. Reaching the lifetime limit of R500 000 in a prompt manner amplifies the effect compounding has on gain in this tax-free environment over the long term.

Within a TFSA, capital can be allocated to different asset classes. Listed property, equity, cash or bonds are some of the available options. However, to maximise your tax saving and generate higher returns, some options are better suited to a TFSA – an account in which investments can grow uninterrupted by tax.   

ASSET CLASS ALLOCATION

Aimee Glisson

 A TFSA is most advantageous for equity and listed property investments, as these asset classes deliver higher real (after inflation) returns than cash and bonds over the long term. In addition, interest on cash and bonds benefit from income tax exemptions (the amount depending on the individual’s age). Additionally, there is no inherent underlying growth in income from these investments and capital gain opportunities are limited. Income on equity and listed property investments (in the form of dividends or REIT distributions) is normally taxable in the investor’s hands, as are capital gains above R40,000 per annum. Hence, these investments generate higher tax savings in a TFSA than cash and fixed income.

It is also pertinent to remember that although listed property in a TFSA delivers large tax savings, these tax savings do not apply to global listed property investment. In many of these global listed property funds, which receive distributions from a foreign REIT, foreign dividends tax will be withheld.

WHY INVEST IN PROPERTY?

Given the downturn in the economy and the advent of the Covid-19 pandemic last year, South African listed property has underperformed other asset classes for three consecutive years. Currently, the forward income yields, taking into account the expected recovery and stabilisation of yields going forward, indicate that listed property valuations are extremely attractive. Long-term investors who exercise patience have an opportunity to gain property exposure at the current depressed price, which reflects a significant discount to NAV.

There could be huge tax benefits derived by including listed property in a TFSA, especially considering the potential capital gains going forward as confidence in the sector is restored and yields stabilize. Additionally, there are significant benefits of compounding total returns when re- investing the income yield generated by listed property over a long-term horizon.

TFSA’s AND LISTED PROPERTY: A COMPLIMENTARY DUO

Wealth creation through the compounding of South African listed property total returns is exactly what an investment in listed property provides for the patient investor. Coupled with a TFSA, an investor reaps tax savings on the income and capital gains delivered by listed property, which materially enhances the compounding effect on their wealth. A long-term investor wanting exposure to South African listed property should act within the next two weeks in order to take advantage of this year’s tax-free contribution.

To find out more about Metope Investment Managers, speak to your financial advisor or visit www.metopegroup.com



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