When deciding where you can channel your next investment, considering the property market is a step in the right direction.
Having regard to the different avenues one can pursue when purchasing property, it is advised to investigate which avenue is best suited, keeping your short to long term goals in mind.
With that being said, let us consider purchasing property in a trust. By simple definition - a trust is a legal entity where the trust founder places assets under the control of the trustees for the benefit of the trust beneficiaries. From the outset, in answering whether a trust is suitable for you, your personal circumstances and goals are going to be deciding factors.
The first and most obvious question would be, “Why should you consider utilising a trust when purchasing property?”.
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There are various benefits but the most important of which are below:
1. The separation of ownership.
The property would not fall part of your own estate but rather that of the trusts. This would mean that upon your death, the property would not be wound up in your estate subject to various costs such as estate duty, capital gains tax, executor’s fees, transfer duty (subject to the relevant exemptions) and transfer fees. The trust does not die and continuity is thus also an attractive advantage.
2. Reduced value of your personal estate.
By not owning the property in your own name, upon your death the estate duty exposure of your own estate would be far less.
3. Protection from creditors.
In the event that you are declared insolvent, the property is safe from your creditors as the property is not owned by you, but by the trust.
4. Suitable Management.
In the situation where you struggle with an age-related illness to the extent that you are no longer capable of managing your own affairs, the property owned by the trust would ensure that your illness does not affect the management of the property. Furthermore and in the event that an illness of that nature becomes a reality, the trustees would be able to sell the property if need be without your family having to undergo a High Court application to apply for a curator to manage your affairs in order to sell the property.
5. Income earned by the property and tax strategies.
In the event that the property is tenanted, the trust is thus producing an income. The income would be taxed at the applicable rate of 45%. However, the trustees have the authority to distribute the profits of the trust to the beneficiaries in order to minimise the tax implication. The beneficiaries would then pay tax on such distributed profit according to their own personal tax rate. This would of course be far lower than 45% depending on your annual income.
Know the risks and disadvantages of a trust
The above points are motivating factors when assessing whether to use a trust. As you can see, your personal circumstances would have an influence such as, amongst others, whether you are prone to risks of insolvency, whether your personal income tax rate is already high and if there is a history of mental illness in your family.
However, it is equally important to address the possible risks and disadvantages of owning property in a trust:
1. Capital gains tax implications.
In the event that the property is sold, the capital gains tax percentage is far higher than that which would be charged if the property was owned by you in your personal capacity. It must be noted that exemptions apply to capital gains where the property is utilised as your primary residence and personally owned. In the event that you utilise the property as your primary residence but it is owned by the trust, there are provisions available but the relevant costs involved could prove the exercise impractical.
2. Tax on income earned by the trust.
If the property is tenanted, the rental would be considered an income earned by the trust which would be taxed at a rate of 45% no matter how little the rent. Take note of the tax strategies that can be utilised in this regard as highlighted earlier.
3. Obtaining finance.
A troublesome disadvantage arises in the event that the trust requires finance in order to purchase property. Financial institutions would very rarely give 100% mortgages to trusts due to the high risk nature. The reason being that the procedures are far more complex in the event that there is a default in payment.
It is for this reason that banks require the trustees to stand surety for the loan where large deposits are often required. How many trustees would stand surety will depend on the surrounding circumstances such as the existing trust assets, income generation and overall financial standing. However, the requirements will differ from bank to bank but it is more often than not that the banks will require more than less trustees to stand surety.
With trusts, one cannot prescribe a “one size fits all” guidance approach. It is for this reason that it is encouraged to make use of expert tax consultants or property practitioners whom will help you make the right decision taking into account your personal circumstances and goals.
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