SHOULD I BUY MY PROPERTY IN MY NAME OR IN A CC, COMPANY OR TRUST (By: Dykes van Heerden Inc, 10 Sept 2010)

10 Sep 2010

 

Apart from disadvantage that transfer duty is levied at an 8% flat rate on the purchase of a property by a Company or Close Corporation, a Company or Close Corporation also has the following disadvantages in regard to the payment of tax when it sells a property:-

  1. The Capital Gains Tax (CGT) is calculated at a rate of 14% of the capital gain;
  2. In addition it pays Secondary Tax on Companies (STC) or Dividends Tax (in both instances of 10%) when declaring a dividend i.e. this tax is payable when the net profit is distributed to the shareholders or members;
  3. The R1,500,000 exemption in respect of Capital Gains Tax is not applicable even if the property is the "primary residence" of the shareholders or members.

With a Trust, again the Trust has to pay 8% transfer duty on the purchase price of the property. The following considerations apply when a property is sold:-

  1. Capital Gains Tax of 20% is payable on the capital gain when the property is sold, but if the capital gain is distributed to the beneficiaries, they will then pay Capital Gains Tax at their own personal rate i.e. somewhere between 0% and 10%;

  2. No STC or Dividends Tax is payable by a Trust;

  3. The R1,500,000 exemption in respect of Capital Gains Tax is not applicable even if the property is the "primary residence" of the trustees or beneficiaries.

  4. In view of the aforesaid, unless extraordinary circumstances prevail, a house which will be the "primary residence" of the person living in the same should be purchased in the personal name of such person so that the person qualifies for the R1,500,000 exemption on Capital Gains Tax when the property is sold, unless one places a premium on the protection afforded by a Trust in the case of insolvency or on the saving in estate duty which can arise on the death of the relevant person (in which event the Trust would purchase the property).

  5. Unless circumstances dictate otherwise, we would as a general rule suggest that in the case of the purchase of further properties, if it is the intention to retain the property indefinitely or if it is the intention to retain the proceeds of the property in the Trust (remembering that this will attract Capital Gains Tax of 20% - which is the same rate as that charged in respect of Donations Tax) the property should be purchased in the name of a properly structured Trust. This is particularly so as in any event Estate Duty is charged at the rate of 20% in respect of the portion of the estate that exceeds R3,500,000.00. If however it is the intention to sell the property within a reasonable period of time and not to retain the profits in the Trust, then we would suggest that such property be bought in the name of the individual to save on transfer duty (unless one wishes to avail oneself of the protection which a Trust gives in relation to the parties becoming insolvent).

  6. An entity owning residential property should not register for VAT to claim either transfer duty or VAT paid on the purchase of such property as a VAT input, as rental income on residential properties is exempted from VAT.

Please note that we are not tax consultants and that you should always consult with an expert in tax before making your final decision.