what's the best way to buy a property?
One of our attorney’s recently shared with us that they are receiving a significant increase in questions around property taxes. The biggest question seems to be; “Should I buy my property as a CC, Company or as a Trust”.
As a standard suggestion, we always advise our clients to run these sorts of questions by their tax advisors as there are often many qualifications and legal loop holes that apply to different setups, but here is a general overview from one of our attorneys – hope it helps!
As a standard suggestion, we always advise our clients to run these sorts of questions by their tax advisors as there are often many qualifications and legal loop holes that apply to different setups, but here is a general overview from one of our attorneys – hope it helps!
BUYING AS A CC OR COMPANY
A Company or Close Corporation has the following disadvantages in regard to the payment of tax when it sells a property:
- The Capital Gains Tax (CGT) is calculated at a rate of 18,6% of the capital gain;
- In addition, the shareholders or members shall pay Dividends Tax of 15% when receiving a dividend i.e. this tax is payable when the net profit is distributed to the shareholders or members;
- The R2m exemption in respect of Capital Gains Tax is not applicable even if the property is the "primary residence" of the shareholders or members.
BUYING AS A TRUST
With a Trust, the following considerations apply when a property is sold:
- Capital Gains Tax of 26,7% 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 13,3%;
- No Dividends Tax is payable when the profits are distributed to the beneficiaries of the Trust;
- The R2m exemption in respect of Capital Gains Tax is not applicable even if the property is the "primary residence" of the trustees or beneficiaries.
* 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 R2m 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).
* 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 26,7%) 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 R3.5m.
* 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.
* 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 26,7%) 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 R3.5m.
* 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.
REQUIREMENTS FOR TAX RELIEF TRANSFERS (UNTIL 31 DECEMBER 2012, NO TRANSFER DUTY, CGT OR DIVIDENDS TAX)
- Property must be mainly used for residential purposes (no holiday rental);
- Entity must have been the registered owner on 9 February 2011;
- Property must be less than 2 hectares in size;
- Entity must be deregistered after the transaction;
- To be transferred to connected persons; and
- Existing bonds to be dealt with: substitution of debtor or cancellation of existing bond and registration of new bond.
**Please note that we are not tax consultants and that you should always consult with an expert in tax before making your final decision.**
-
