12/07/2026
Tax and Investments – Part 1: Choosing the Right Investment Vehicle from a Tax Perspective
This is the first article in a series of three exploring the impact of taxation on investment planning. A sound practical understanding of tax is essential for making informed investment decisions and structuring portfolios efficiently.
The purpose of this article is to provide practical guidance on selecting the most appropriate investment vehicle based purely on tax considerations.
In this article, we compare two of the most commonly used voluntary investment vehicles:
- Endowment Investment Plans
- Platform Unit Trust Investments (also referred to as Flexible Investment Plans)
Endowment Investment Plans
In terms of Section 29A of the Income Tax Act, insurers are required to divide their business into five separate tax funds, each taxed independently according to the type of investor. This is commonly referred to as the Five Fund Approach.
For most investors, the two relevant funds are the Individual Policyholder Fund and the Company Policyholder Fund which will be discussed today.
Where an endowment is owned by an individual, interest-bearing income, such as interest earned on money market funds, rental income from property portfolios, and coupon income from bond funds, is taxed at 30%. Capital gains arising from growth assets, such as shares and the capital appreciation of property investments, are taxed at an effective Capital Gains Tax (CGT) rate of 12%.
Where the endowment is owned by a company, interest-bearing income is taxed at 27% and capital gains are taxed at an effective rate of 21.6%.
One of the major advantages of an endowment is that the insurer pays the tax on behalf of the investor. As a result, the investment growth does not need to be declared in the investor's annual income tax return.
Platform Unit Trust (Flexible Investment Plan)
The tax treatment of a Platform Unit Trust depends on whether the investment is owned by an individual or a company.
Where the investment is owned by an individual, taxation is based on the investor's own marginal tax rate. For an individual in the highest tax bracket, interest-bearing income is taxed at up to 45%, while capital gains are taxed at an effective maximum rate of 18%.
The individual investor also has the benefit of certain annual tax exemptions if invested in this plan. The first R23,800 for individuals under 65 years old and R34,500 for individuals over 65 years old is exempt from tax. The individual further qualifies for an annual capital gains exemption of R50,000.
Where the investment is owned by a company, interest-bearing income is taxed at 27% and capital gains are taxed at an effective rate of 21.6%.
Practical Considerations
- Individuals with a marginal tax rate below 27% may be better off investing through a Platform Unit Trust rather than an endowment.
- The underlying asset allocation is equally important. Balanced and Equity Funds generally have relatively low exposure to interest-bearing assets and higher exposure to growth assets. In these cases, the endowment's effective CGT rate of 12% may provide a significant tax advantage over the maximum effective individual CGT rate of 18%.
- For company-owned investments, there is generally little difference in taxation between an Endowment and a Platform Unit Trust, as both are effectively taxed at 27% on interest and 21.6% on capital gains.
- Because tax within an endowment is paid by the insurer, the investment returns do not increase an individual's taxable income. This may assist in reducing the investor's overall marginal tax burden.
- For individuals with a long-term growth objective, an Endowment Investment Plan can be a particularly tax-efficient solution, especially where the portfolio has a high allocation to growth assets such as equities and property.
- In many cases, the most effective strategy is not choosing one vehicle over the other, but using both. Cash and bond investments may be more tax-efficient within a Platform Unit Trust, while equity and property investments may benefit from being held within an Endowment.
- In many cases it would be beneficial to split the investment between spouses so that they both qualify for the exemptions.
- Endowments also offer estate-planning advantages. Where beneficiaries are nominated, the proceeds are generally paid directly to the beneficiaries and do not attract executor's fees. By contrast, Platform Unit Trust investments typically form part of the deceased estate and are therefore generally subject to executor's fees.
Conclusion
Choosing the most appropriate investment vehicle is not always straightforward. Tax is one of the most important considerations, but it should never be viewed in isolation. Factors such as liquidity requirements, investment horizon, estate planning objectives, and the investor's personal tax circumstances should also form part of the decision-making process.
A well-structured investment strategy takes all of these factors into account. By selecting the right combination of investment vehicles, investors can improve after-tax returns while ensuring that their portfolios remain aligned
Read the article on our website: https://wgawealth.co.za/tax-and-investments-part-1-choosing-the-right-investment-vehicle-from-a-tax-perspective/
This is the first article in a series of three exploring the impact of taxation on investment planning. A sound practical understanding of tax is essential for making informed investment decisions and structuring portfolios efficiently.
