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Trusts and tax on property purchases

Written for YourProperty

A reader who plans to purchase a property has asked the Property Poser panel to comment on whether it should be bought in the name of a legal entity, such as a trust, or in his personal capacity.

In particular, he has asked about tax implications to keep in mind and also whether a legal entity could be used for the protection of his property. He does not indicate whether this is an investment property or meant to serve as his primary residence, so the experts have considered various scenarios.

As a general rule, one's primary residence is owned in one's personal capacity, says Schalk van der Merwe from Rawson Properties in Somerset West, Cape Town.

"One reason for this would be the primary residence exemption provided for under the Capital Gains Tax provisions in the Income Tax Act."

Van der Merwe says the first R2 million of any capital gain on the sale thereof is disregarded for CGT purposes.

"This means that you need to make a capital gain of more than R2 million for the sum to be subject to CGT."

If the proceeds of the sale of a primary residence do not exceed R2 million any resulting capital gain must be disregarded, unless a part of the residence had been used for the purposes of trade, says Van der Merwe.

"To qualify for this exemption, the property must be owned by a natural person, as opposed to a legal entity, and the owner or his or her spouse must ordinarily reside in the property."

Van der Merwe says this therefore means that if a trust, for example, is the owner of such a property, this exclusion will not be applicable.

As with all rules, there are exceptions, says Van der Merwe.

"If the individual already owns other interests in his own name that may expose the property to risk, it may be more prudent to acquire it either in his spouse's name or even in the name of a trust, notwithstanding the loss of the tax exemption."

Grant Hill of Miller Bosman Le Roux Attorneys in Somerset West says a trust is viewed as a legal entity separate from its trustees and beneficiaries.

"The assets held by the trust are thus protected from any unfortunate eventualities which may befall either the trustees or beneficiaries in their personal capacities."

Protection of assets should be one's main aim when using a trust, because the tax dispensation applicable to trusts is not always favourable, says Hill.

"Assets that are to be held for a short period of time or for speculation purposes are possibly also best not held in trust."

Again, upon disposal, the CGT implications for assets held by a trust may be more onerous, says Hill.

"This is also true in the case of property. Although it is no longer more expensive to acquire a property in the name of a trust, the transfer duty and fees are not the only costs to consider."

Hill says the potential tax implications of subsequent disposal should also be kept in mind.

"As you can see, there are various factors to consider and there may not be a clear-cut answer."

All the facts have to be considered before a decision is made and, even then, what may be appropriate for one person's situation may not be appropriate for another, says Hill.

To ask a property related question, visit www.yourproperty.co.za.

Issued by:

Coetzee Gouws
082 575 7991
041 368 4992
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www.fullstop.co.za

On behalf of:

Rawson Properties Helderberg & Miller Bosman Le Roux Attorneys
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