A client is considering a property purchase and would like to know whether it would be better to buy it as an individual or in a trust, writes financial planner Pieter Willem Moolman.
Property intelligence is not everyone’s forte and, unfortunately, there is no one-size-fits-all answer – so much depends on a person’s situation. Knowing my client’s personal financial position, I’m well-placed to advise her on her options.
For estate-planning purposes, a trust is ideal. In the event of death, property held by a trust does not form part of a person’s estate, thus saving on estate duty.
When buying a property, a trust must be in existence before the agreement of sale is signed. The details of the trust – including the registration number, names of trustees and letter of authorisation from the master – must all be handed in with the deed of sale.
On the downside, however, trusts can be quite expensive from a tax perspective.
For example, you pay more transfer duty for a trust than you would if you acquired the asset in your own name. This is because individuals pay transfer duty on a sliding scale, with a portion of the purchase price being exempt.
When selling immovable property, capital gains tax is also higher for a trust. In the case of an individual seller, the first R1.5 million is exempt from capital gains tax, as long as the property is the primary residence.
This brings me to another point.
Don’t ever use a trust to buy your primary residence. Always buy such a property in your own name to maximise your capital gains tax benefit.
If you did buy your primary residence through a trust or other entity, the South African Revenue Service currently allows you to transfer the property into your own name – or that of your beneficiary – without paying income or capital gains tax or transfer duty.
This special dispensation will apply until January 2013.
If you are contemplating buying property simply to speculate and sell at a profit within the next five years, it would not be wise to buy it in a trust.
However, if you are buying a farm or beach house as a long-term holiday home investment, then – for estate-planning reasons – a trust would be a good idea.
The bottom line is that, when investing in a property, your intention plays a critical role in determining whether you should purchase it in your own name or in a trust.