This is a common question but it is not a simple question; there are pros and cons to both options.
The simple answer is … it depends.
It depends on why you are buying the property … it depends on your financial planning … it depends on what you goals are for the property … it depends on your personal financial position … and so on.
However, the principal considerations with using Trusts are tax implications and asset protection:
Capital gains tax (CGT), income tax and estate duty implications need to be considered when determining how to purchase your property.
Income tax is the tax that is paid on your “taxable” income (gross income after subtracting permitted deductions).
Most of us have a basic understanding of Income Tax and how it affects us so we will not go into too much detail here.
Income tax for individuals
Personal income tax general ranges from 18% to 40% of your taxable income depending on what you earn.
Income tax for Trust’s
Trusts currently pay a flat Income tax rate of 41% on its taxable income.
Capital gains tax
Capital gains tax is a form of income tax.
A “capital gain” arises when you sell an asset and the proceeds of that sale exceed the original purchase price of the property (less improvements over the years such as a pool, etc). Capital gain can also be called “profit”.
Capital gains tax became a reality on 1 October 2001; for assets obtained before this date, the value of the asset on 1 October 2001 will be used to determine the capital gain (therefore the increase from the date of purchase to 1 October 2001 will be excluded from the capital gain).
CGT for property in your personal name
When a capital gain is realised on an individual’s asset, 33.3% of that profit will be included in your “taxable income” for that tax year.
If you own your home in your personal name, you will receive an exemption on the capital gain up to an amount of R2,000,000.
This only applies to your primary residence.
After the exemptions, the 33.3% of the capital gain will be included in your taxable income for that year. You will then be taxed according to your personal income tax bracket.
For example: If your primary residential property was bought for R500,000 and you sell it for R3,000,000, only R500,000 of the capital gain will form part of the CGT calculation. (This example does not include improvements over the years, such as a swimming pool, that should be added to the base cost.)
Now you calculate 33.3% of R500,000 (which is R166,500) and this amount (R166,500) is added to your taxable income for that tax year.
Thereafter the R166,500 will be taxed according to your tax bracket (which may increase for that year due to this addition income).
On investment or leisure properties (i.e. properties that are not your primary residence) the exemption of R2,000,000 does not apply.
It is confusing, so please contact us if you need help.
CGT for property in the name of a Trust
When a capital gain is realised on a trust’s asset, 66.6% of that profit will be included in the Trust’s “taxable income” for that tax year.
Also, a trust gets no exemption of R2,000,000 on a primary residence.
Therefore, a trust will pay a flat CGT rate of 27.3% on any capital gain (66.6% of 41%).
Once again, this is confusing so contact us if you need help.
Estate duty for individuals
When an individual dies their estate will be subject to estate duty or “death tax”.
Estate duty is payable on estates with a nett value above R3,500,000.
It is charged at the rate of 20%.
The value of your property would be included in your estate and may push the nett value of your estate over the R3,500,000 threshold.
Estate duty for Trusts
Technically a trust is not subject to estate duty as it never dies.
Without going into much detail, when a trust is dissolved or terminated its’ assets, if any, will normally move to the beneficiaries.
Protect your property from creditors
A trust is a very useful way to protect your properties, as a trust is viewed as a separate person from the trustees and the beneficiaries in the eyes of the Law; therefore, it should not be affected if financial difficulties befall you in your personal capacity.
For this reason, despite the tax implications, many people consider purchasing a property in the name of a trust.
If you have a long term view and are purchasing properties as an investor or for leisure purposes, using a trust may well be the best option and the greater income tax rate that trusts attract can be mitigated by the reduction in your personal tax liability (i.e. you can keep your personal income tax lower or in a lower tax bracket lower) and the longevity inherent in a Trust (as it can survive you).
However, it is often best to keep your primary residence in your name, the principle risk being that it is not protected from creditors.
DISCLAIMER: THERE ARE MORE CONSIDERATIONS THAN WE CAN COVER IN THIS ARTICLE SO ONLY USE THIS INFORMATION AS A GUIDE. THIS INFORMATION DOES NOT CONSTITUTE LEGAL ADVICE. IT IS ALWAYS BEST TO DISCUSS YOUR SITUATION WITH AN ATTORNEY; CONTACT US AT 0861 88 88 35; firstname.lastname@example.org AND THROUGH THE CONTACT FORM ON THIS PAGE.
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