4 ways of buying property: Tax and legal implications (Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa: 23 Jan 2018)

23 Jan 2018

This is according to Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa, who says deciding in which legal entity to buy the property is not a decision that should be entered into lightly, as each has its pros and cons.

He says South African law recognises various types of ‘persons,’ regarded as either natural persons or juristic persons. “A natural person is defined by law as someone who acts and conducts business in their own name, while a juristic person is a legal entity, such as a company, trust or close corporation.”

The definition of a primary residence is a property which is owned by a natural person.

1. Buying a property as a natural person

The most common of the four main options is buying a home in your own name as an individual, without representing any other legal entity. When purchasing a property as a natural person, will be paid according to a sliding scale depending on the purchase price of the home.

As per the 2017 budget, homes priced from R0 to R900 000 are exempt from transfer duty, while properties priced between R900 001 and R1.25 million pay 3% on the value above R900 001. Homes priced between R1 250 001 and R1 750 000 will pay R10 500 plus 6% of the value exceeding R1.25 million, and properties priced from R1 750 001 to R2 250 000 will pay R40 500 plus 8% of the value exceeding R1 750 000.
Homes priced R2 250 001 to R10 million will pay R80 500 plus 11% of the value above R2 250 000, while homes priced from R10 000 001 and above will pay R933 000, as well as 13% of the value exceeding R10 million.

With regards to Capital Gains Tax (CGT), provided the property is the owner's primary residence, they will be exempt from paying any CGT on the first R2 million of any profit made on the sale of the property. Also, where the primary residence is sold for R2 million or less, the full capital gain will be disregarded.

The definition of a primary residence is a property which is owned by a natural person. The owner or their spouse must ordinarily reside in the property as their main residence, and it must predominantly be used for domestic purposes.

While buying a home as a natural person is the most plausible option for most buyers, says Goslett, there is a downside to owning property in your own name if you run your own business. “As a business owner, if you run into financial trouble, you risk losing your home. Any properties you own will become prime targets to creditors who want to mitigate their losses.”

He says another possible con is that, if the property is not your primary residence or is used for business purposes, the CGT exemption will not apply, and estate duty is payable on death.

2. Buying property as a (Pty) Ltd

A private company that purchases an immovable property will pay transfer duty at the same rate as a natural person. However, no transfer duty is payable by the seller if they are registered for VAT and the property forms part of the operations for which the seller is registered.

Should the property be sold as part of a rental portfolio such as a guest house, the deed of sale must contain certain specific provisions and may be zero-rated for VAT, which means no transfer duty or VAT is payable.
“A private company will pay comparably more CGT, with an inclusion rate of 50%, and an income tax rate of 28%, which translates into an effective CGT rate of 14% -” because a company is not a person who can pass away, no estate duty is payable,” says Goslett.
However, if someone is a shareholder of the company, the value of the shares and the loan account are deemed as assets in their estate and the value as verified by the company’s accountant, together with any amount owing by way of loan account, will increase the value of the estate. Also, a 10% secondary tax on companies (STC) of 10% is levied on all profits distributed in the form of dividends.

“In the instance where a company purchases a property with the intention of selling it to make a profit and does not keep it for an indefinite period for rental purposes, the South African Revenue Service (SARS) may regard the investor as a dealer and levy income tax at the investor’s tax rate on the profit.
“If income tax is applicable, then no capital gains tax will apply,” says Goslett.

A significant benefit of owning property through a private company is that this type of ownership can accommodate up to 50 shareholders, which includes private individuals, trusts, and companies.
Because the company is a separate legal entity, there is some protection afforded to shareholder’s assets, says Goslett, which can only be attached to cover debts incurred by the company if the individual has stood surety for the company. “Most financial institutions will insist that shareholders sign personal suretyships in respect of any loans made by the financial institution to the private company.” As with a company, a close corporation is a separate legal entity.

3. Buying a property as a close corporation

While the introduction of the Companies Act of 2008 phased out many close corporations, existing close corporations could elect to continue to exist until deregistered, dissolved or converted into a private company governed under the new Companies Act.
Close corporations face the same transfer duty, CGT and tax implications as companies. As with a company, a close corporation is a separate legal entity.

The difference between buying in a close corporation and a company, is that close corporations are governed by the Close Corporations Act 69/1984. They are managed by members, ownership is restricted to a maximum of 10 natural persons and the financial statements must be prepared by an accounting officer (there is no need to provide audited financials, which greatly brings down the administration fees.)
While another close corporation or company cannot be a member of a close corporation, a trust can be registered as a member of a close corporation.

4. Buying property through a trust

A trust is established by a founder or settlor, trustees, and beneficiaries. The person that creates the trust is referred to as the founder or settlor. They will appoint trustees in terms of the ‘trust deed’ who will manage the affairs of the trust for the benefit of the beneficiaries that are named in terms thereof.

Goslett says a property held within a trust will not form a part of an individual’s estate when they pass away, which means that the estate will benefit from estate duty savings. “Another benefit is that since it is a separate legal entity, the property held within the trust is protected from being ‘attached’ by creditors of the beneficiaries, which provides a safe option to protect assets.”

Other benefits include the fact that there are no executor fees when the owner dies, as there is no need to transfer the property into the name of their heir. All repairs and maintenance, as well as other bills such as water and rates, will be for the trust’s account.

The downside is that a trust attracts the highest rate of CGT, with an inclusion rate of 50%, and income tax rate of 40%, meaning an effective CGT rate of 20%. Another con is that the founder does not have control over the property, as the trust will be the legal owner of the property and the trustees will have the power to administer it.

If finance is required to purchase the property, banks are less likely to grant a full bond to a trust and might be higher deposit requirements, says Goslett

“Because of the various tax and legal implications that are applicable when selecting the right vehicle in which to buy property, it is always best for the purchaser to consult with legal experts to explore all consequences of each option before making their final decision,” he says.