Buying property as a private individual, as a company or through a trust Though many might not be aware of it, there are three different forms of homeownership in South Africa. These include owning a home as a natural person, a company, or as a trust. Each option has its own set of pros and cons, which is why it is important to understand each option before going ahead with the purchase.
Buying as a natural person The most popular common option is to buy a home as a ‘natural person’. This means that the home will be registered in your name as an individual, without representing any other legal entity. When purchasing a property as a natural person, transfer duty will be paid according to a sliding scale depending on the purchase price of the home.
One benefit of purchasing as an individual is that paying Capital Gains Tax (CGT) will be exempt of the first R2 million of any profit made on the sale of the property provided the property is the owner's primary residence. The definition of a primary residence is: a property which is owned by a natural person, the owner or their spouse ordinarily resides within the property as their main residence, and it is predominantly used for domestic purposes. If the primary residence is sold for R2 million or less, the full capital gain will be disregarded.
The downside of this form of ownership only arises if you run your own business. As a business owner, if you run into financial trouble, you risk losing your home. Any properties you own will become prime targets to creditors who want to mitigate their loses.
Buying as a company A private company that purchases an immovable property will pay transfer duty at the same rate as a natural person.
However, as a private company, the owners will pay comparably more CGT, which is currently at a rate of 22.4%. On the upside, because a company is not a person who can pass away, no estate duty is payable.
Things get slightly more complicated if someone is a shareholder of the company that owns the property. The value of the shares and the loan account are then deemed as assets in their estate and the value (as verified by the company’s accountant) together with any amount owing by way of loan account, will increase the value of the estate. Also, a 20% Dividends Tax is payable on all dividends paid to shareholders. Dividends tax is withheld from the shareholders’ dividend payment by a withholding agent (either the company paying the dividend or, where a regulated intermediary is appointed).
Because the company is a separate legal entity, there is some protection afforded to shareholder’s assets. While most financial institutions will insist that shareholders sign personal suretyships in respect of any loans made by the financial institution to the private company, the shareholder’s assets can only be attached to cover debts incurred by the company. This allows buyers who purchase as a company some protection of their own personal assets.
Buying through a trust While the cost of starting a trust can be significant, purchasing a property through one has certain advantages. A Trust is often used to protect the assets and ensure that the appointed beneficiaries, which are more often than not the trust founder’s children, get the benefit of using the assets if something happens to the trust founder.
A property held within a trust will not form part of an individual’s estate when they pass away, which means that the estate will benefit from not having to pay estate duties and executor fees. As a separate legal entity, the property held within the trust is also protected from being attached by creditors of the beneficiaries. All repairs and maintenance, as well as other bills such as water and rates, can be billed to the trust’s account.
The main downside is that a trust attracts the highest rate of CGT, which is currently at a rate of 36%. Another potential issue is that the founder does not have control over the property, as the trust will be the legal owner and the trustees will have the power to administer it – much like an Home Owners Association or Body Corporate runs a sectional title estate.
Take advice from a tax consultant and legal expert Because of the various tax and legal implications that are applicable when selecting the right vehicle in which to purchase property, we always recommend that the purchaser should consult with a legal expert and a tax consultant to explore all consequences of each option before making their final decision.
Stay safe and well everyone.
Best to all, Margie, Clare, Fiona, Terry, Arlene, Brigitta, Alison & Jane