Monday, 3 January 2011

The PROS and CONS of transferring Property from a Trust to your Personal Name

A significant new tax break which was granted by the South African Revenue Services on October 31 this year allows those whose residential properties are 'held' in companies, close corporations or trusts to transfer them, free of income or capital gains tax or transfer duty, into their own names or those of their beneficiaries.

The new law allows greater flexibility about the choice of the beneficiary - and it can be made use of until January 1 2013.

This new ruling should be made use of by as many people as possible because there is no logic in sticking to the old holding entities.

To hold a property in a trust, a close corporation or a company will automatically result in its eventually being taxed higher on capital gains when sold than if it were in the individual's name.

Furthermore, no concessions will be made for it possibly being the owner's primary residence. If the property is the owner's primary residence and is registered in his name, the first R1.5m will be exempt from tax.

The advantages of accepting individual ownership have been reinforced from the start of this year by the government's instituting an annual levy for the continued establishment of corporate entities. This could add significantly to the annual holding costs of such entities.

Under the amended law the person taking ownership of the property from a company must have lived in and used it primarily for domestic purposes from or before 11th February 2009. Furthermore, he must still be living there.

The beneficiary must also be a 'connected' person in terms of the Income Tax Act. This means that the owner himself and a relative must together have at least 20% of the holding company's shares.

If the property is being taken over from a close corporation, the other owner/partner can be another member of the close corporation or a relative of such a member - but in all cases the transfer will become invalid if steps are not taken to wind up, liquidate or de-register the company or close corporation within six months of the transfer of the property.

Similar rules apply to property transferred from trusts, but there the 'connected persons' concept has been extended to apply to any beneficiary of the trust or a relative of that person.

Where the original holding vessel has a more complicated structure, provision is made for unbundling this.

For example where a property is owned by a company, a close corporation or a trust, which is in turn owned by another corporate identity, or where the shares in the company are owned by a trust the beneficiaries of which live in the home, the new law again allows for the free transfer of the property from the company to the trust and then from the trust to one or more beneficiaries.

Again, the person to whom the property is transferred must have been using it as his primary residence for the stipulated period to qualify for the capital gains tax exemption.

Although the tax savings of a transfer to individual ownership are significant, the conveyancing fees will still be payable, as on any normal residential property transaction.

Furthermore, if a property is bonded,, the costs of cancelling the bond and registering a new one will have to be allowed for. It is possible that the new owner under today's stringent National Credit Act restrictions might find himself unable to raise a bond of the same size as the original - he might even be refused any bond.

This matter should be looked into before the transfer is affected.

*Lanice Steward is MD of the Cape Peninsula estate agency Anne Porter Knight Frank

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