In previous years it certainly made good estate planning sense when purchasing fixed property, either a residence, a holiday home or business premises to register this property in an inter vivos trust. This form of registration ensured that the growth of value of the property was ring-fenced within the trust and did not affect the value of the individual’s estate and provided for continuity through generations.
This is according to David Knott, a fiduciary specialist from Private Client Trust who advises that some even recommended that you should register in a trust so as to enable the trust and not the property to be “sold” later, thereby by-passing the payment of transfer duties. “This was clearly not what Government had intended and the legislation was amended accordingly only once the practice had become popular. Many of our Trust Law specialists had always argued that such a “sale” was voidable as the “selling” of a trust conflicted with established trust law. Buyers continued to risk the consequences of a voidable “buying” of a trust as both parties wished the transaction to succeed.”
However, Knott advises that this practice has ceased since the introduction of Capital Gains Tax (with effect from 1 October, 2001). “This introduction has brought about many unintended consequences of past good planning. Capital Gains Tax now makes it onerous to hold fixed property in a trust and one should carefully consider the financial implications before deciding how the property should be held. In the case of one’s primary residence, it is almost always most cost efficient to register in the individual’s name. This is because an individual is entitled to a rebate of R2 million off the gain when his domestic primary property is sold - this rebate is not granted to a trust or a company.”
In other words, a trust or company is liable for Capital Gains Tax from the first Rand of gain from date of purchase to date of sale, without benefit of the first R2 million gain. In addition, an individual is also taxed at a lower rate to that of a trust or company.
“In the case of a second holiday home or business premise, one needs to interrogate circumstances around such purchases, the length of time that asset is to be held, the growth prospects of that asset and how it is to be utilized. Before such registration takes place one should also take professional advice as Capital Gains Tax.”
In the 2018 and current 2019 tax periods the inclusion rate and effective rates were:
Inclusion rate
Trusts 80%
Companies 80%
Maximum effective rate
Individuals 18%
Trusts 22,4%
Companies 36%