There is always a debate as to which vehicle is best for purchasing property. There are indeed pros and cons to every situation, and individual circumstances will also impact upon the ultimate decision made.
“On the whole, we encourage buyers of residential property to purchase their primary residences in their personal capacities, as this way they will enjoy the R2 million capital gains tax exemption when they come to sell. However, for second and third properties that cannot be construed as primary residences, buying in a trust makes the most financial sense,” says Reynolds.This is according to Carol Reynolds, Pam Golding Properties' area principal for Durban Coastal.
“On the whole, we encourage buyers of residential property to purchase their primary residences in their personal capacities, as this way they will enjoy the R2 million capital gains tax exemption when they come to sell,” she says.
“However, for second and third properties that cannot be construed as primary residences, buying in a trust makes the most financial sense.”
She says trusts offer homeowners huge value in that they are well suited for asset protection and ring fencing risk. In addition, they have the benefit of being passed from generation to generation, and hence bypassing estate duties.
The other advantage of owning property in a trust is that the trust can be taxed in the hands of the beneficiaries. This often results in a lower tax bracket for the parties, and hence less tax liability.
“It is, however, important to note that you cannot buy property in the name of a trust to be formed. The trust needs to be in existence at the date of sale,” says Reynolds.
“Fortunately, registering a trust doesn’t take long, usually about two weeks. Ideally, an attorney or accountant will register the trust for you and then it is best to ask the attorney or accountant to stay on as an independent trustee.”
Reynolds says SARS is looking at trusts very closely, so they need to be managed correctly. This means having an independent trustee, maintaining records, maintaining accounts and ensuring that the trust is not deemed to be an ‘alter ego’ - in other words simply an extension of the self in a contrived legal entity.
Most attorneys and accountants will support trust and property ownership in trusts because of the asset protection benefits, as well as the tax savings.
“It is always best to seek advice from an accountant before making a decision in this regard,” says Reynolds.
“Generally, we find that most of our sales transactions are concluded with individuals in their personal names, largely because of the capital gains exemption, while trusts and companies account for a small percentage of sales.”
She says companies tend to be the preferred option for commercial property transactions, whereas trusts are used for both residential and commercial sales.
“It is best to obtain advice before choosing the correct legal entity for a property purchase,” says Reynolds.
“It is also important to have signed resolutions on hand when you are dealing with trusts, as sometimes it can be tedious obtaining signatures from all the trustees, particularly when they do not all reside in the country.”
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