Did you purchase your residence in one of the above entities? Now do you find yourself wondering how you can extricate yourself from this without incurring transfer duty, capital gains tax (CGT), and dividends tax (DT)?
The government has given you an opportunity to unwind this situation by transferring the residence into your name (or the name of a beneficiary or shareholder) without paying transfer duty, DT and CGT.
But you must act before 31 December 2012.
Why has SARS given you this tax break? Part of the condition of this opportunity is that SARS requires that (subject to some recent concessions noted below) you liquidate or deregister the trust, company or CC once the transaction has been completed. This will considerably reduce the number of trusts, companies and CCs in existence and will make SARS’ tasks of administration and enforcing taxpayer compliance easier.
Of course, if your residence is in another entity as part of a long term strategy it may not be in your interest to take this opportunity. A very important factor is to take expert advice to ensure no tax is paid if you do decide to transfer your residence.
Does it make economic sense to have my residence in an individual’s name?
One day you will dispose of your residence (unless as noted above your residence is part of a long term strategy such as preserving your assets in a family trust).
The CGT is significantly lower if the property is in your name. CGT is 13.3% in your name (assuming you pay the maximum marginal rate of income tax at 40%), 18.6% in a company and CC and 26.6% in a trust. In addition, there is a R2,000,000 “primary residence exclusion” for individuals plus a R30,000 “annual exclusion”. You also do not have to worry about other taxes like DT.
The table below compares the different entities.
N.B. The figures shown below should not be taken at face value; they are only a rough guide to illustrate the potential tax savings. Take proper advice on your particular circumstances!
- Dividend tax of 15% applies when companies and CCs distribute the profits. So if you want to take your profit out of the corporate, you will pay another 15% dividend tax over and above the CGT.
- A “special trust” (i.e. a trust created solely for the benefit of a person who suffers from a mental illness or a person who suffers from any serious physical disability) is treated as an individual in this instance.
- Holiday homes – although the “primary exclusion” of R2,000,000 applies only to a “primary residence” and not to a secondary residence such as a holiday home, the tax savings will still be significant.
- On death, the “annual exclusion” increases to R300,000 for the year of death.
- All exclusions are shown at the new, increased rates likely to come into effect shortly.
- CGT for individuals is shown at the maximum marginal rate so it will be a lot less for anyone with a low marginal rate.
- With a trust, you may be able to reduce the CGT substantially by having the profits taxed in the hands of a beneficiary with a low tax burden.
The benefits are self-evident from the table – where there is a R2,000,000 capital gain, it is R372,960 more favourable than a company or CC and R532,800 more beneficial than a trust.
- Do I qualify? Not everyone will qualify, but take professional advice. If your property is mainly used for residential domestic purposes, you are off to a good start.
- Does my holiday house or secondary residence qualify? Yes, the benefit has been extended to houses other than your primary residence, subject to restrictions relating to domestic, rather than business, usage. Remember that the “primary exclusion” of R2,000,000 won’t apply here
- What about my company/trust structure? If you have a “multi-tier” structure (e.g. your company owns the house, and your trust or another company owns the shares in the company) the benefit has also been extended to you (again, subject to restrictions and requirements, so taking advice is essential). .
- Even if I qualify, will I benefit? Take full advice on this – depending on your particular circumstances, there may be good reason to leave the property where it is. Consult a professional on considerations such as estate planning, asset protection, conduiting a trust’s distributions to a beneficiary with a low tax burden etc.
- Are there any risks? The disposal must be carefully structured by a professional to avoid any triggering of donations tax, dividends tax, adverse tax effects of any loan accounts etc. If the property is bonded, remember to give the bank timeous notice of cancellation and also check that the transferee will qualify for a new bond (and if so, at what interest rate).
- To whom should I transfer the property, how should I dispose of it, and at what price? Once again, take advice here – everyone’s circumstances will be different, and there are many considerations.
- When must I dispose of it? By 31 December 2012.
- What will it cost me? The good news is that there is no transfer duty payable, and CGT is “rolled over” i.e. not payable now. Provide for conveyancer’s fees, bond cancellation and registration fees, the cost to deregister or liquidate entities etc.
- Once I have moved my residence into my name, how long do I have before deregistering or liquidating the entity that owned the residence? SARS gives you six months to begin these proceedings and will give an extension if you ask. If there are other assets in these entities, SARS have made concessions which may help you – speak to a professional.
Depending on your circumstances, there are significant potential benefits to you. Act now as the deadline is 31 December 2012, after which this opportunity disappears.
For more information contact Cedric at firstname.lastname@example.org .
© CA(SA)DotNews is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.