A Brief Indication On The Tax Implications Applicable When Buying Immovable Property

There are various options available to buyers when looking at acquiring property. These options are as follows:

In your personal capacity;
In a Close Corporation (If you can still get one, as there are still some Shelf CC’s left);
In the name of a Company; or
Alternatively to have the property bought in the name of a Trust

When acquiring a property there are various questions that a buyer has to ask himself in respect of the reasons for acquiring the property. property tax burden

For example:

will it be the buyer’s primary residence which will be solely for personal use;
will it be a holiday home,
commercial property,
or merely an investment property

The main focus when making the relevant choice is the buyer’s risk that he will be exposed to.

BUYING A PROPERTY IN YOUR PERSONAL NAME

The biggest risk when buying a property in your personal capacity is that you are at risk of losing your home should you find yourself in some financial trouble. You will also have an issue in terms of estate planning in that in the event of the buyer passing away, the property will be caught up in the buyers Late Estate winding up process. This in itself has a lot of troublesome repercussions, namely inter alia:

It may take anything between 9 months and 5 years for the estate to be wound up, which in itself can be very troublesome whether it be for purposes of rental of the property or ownership of the property;
Capital Gains Tax is taxed at an effective rate of 13.6%. Every natural person and special trust is entitled to the primary residence exclusion to the value of R2 000 000.00, after which the capital gain will be calculated on the excess amount;
Executor’s Fees is taxed at a maximum rate of 3.5% plus VAT;
Estate Duty is taxed at a rate of 20% on any assets in excess of R3 500 000.00.

BUYING A PROPERTY IN A CLOSE CORPORATION OR COMPANY

A buyer can experience some level of comfort in respect of Taxation and estate planning when buying a property in the name of a CC or Company.

Dividends Tax at a rate of 15% could possibly be imposed on a dividend pay-out by a CC or Company. Dividend tax is only applicable on a CC or Company where a Dividend is paid out to a shareholder. Dividend tax will be imposed on the sale of shares in the property or on an asset sale.

Capital Gains Tax is also applicable to a CC or Company at an effective tax rate of 18.6%. Capital Gains Tax is not a separate tax but forms part of the party’s income, effectively totalling your tax obligation to 33.6%.

Therefore should you buy a property in your personal name, the tax implication is a lower, but the risks are that you have exposure to creditors and serious financial repercussions on death.

BUYING A PROPERTY IN A TRUST

Taxation in respect of Trust tends to be under the spotlight quite often. One should view a Trust simply as something like a volt. The Tax is brilliant in this structure because you can move the income out of the Trust to its beneficiaries. Although it is the entity with the highest Tax Rate, which is currently 41%.

Special trusts also receives the primary residence exclusion provided that the property is used as a primary residence.

The Trustees have the election to push any rental income down to beneficiaries, who then pay at their own marginal rates. Trusts are the most efficient Estate Planning tool, as all assets in such Trust will continue to exist on your demise. A Trust never dies and as such will never discontinue. Therefore, there will be no Capital Gains tax, Estate Duty or Executors Fees on your death.

Research material Property 24