A Fin24 reader planning to invest some of his pension fund for his wife wants to know what the tax implications would be.
I've received a lump sum from my pension fund.
If I put the lump sum or some of it in an investment account for my wife, how much tax will she have to pay? She is 55 and has no other income except monthly interest from an investment totalling around R26 000 per year. She does receive a monthly pension.
Jaco Prinsloo, certified financial planner at Alexander Forbes responds:
The good news is that giving money to your spouse will not trigger a capital gains or donations tax event. The investment returns she receives on reinvesting the funds might be taxable depending on which investment vehicle is used and how much is invested. There are different taxes that could be applicable like dividends tax, capital gains tax and income tax. The tax treatment would also depend on your marriage regime, for example, if you are married in community of property, or with an ante-nuptial contract.
Any interest received that is more than the R23 800 annual interest exemption gets added to income and taxed at her marginal tax rate. These would be investments or savings in interest-bearing investments like money market funds or a fixed deposit.
Her pension is subject to income tax, even though she might not be paying tax at the moment if it is a small income. If her investments add to her income, like interest or rental income on a property, it is possible that she would need to start paying income tax on her overall income, pension included.
If she invests in unit trusts or a direct share portfolio where dividends are declared, the investment would be subject to 20% dividend withholding tax and most likely capital gains tax. Overseas investments also have different tax regimes to take into consideration.
If she invests in a tax-free savings account, which is definitely recommended, she can invest R36 000 every tax year and the growth on that investment is not subject to any tax. It might not seem a lot to start, but if you add to this investment yearly it adds up over time and it is not too late to start one at retirement for each of you.
It is therefore very likely that tax will be payable in some form or the other. Speak to an advisor to make sure that all of your investments are structured correctly so that you both use all your annual exemptions, while keeping your investment goals and risk tolerance in mind.
Questions may be edited for brevity and clarity.
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