With the changes proposed in the latest budget presented by Minister of Finance Pravin Gordhan, where capital gains tax charged on homes bought in trusts has increased exponentially, as well certain assets now having to be listed in the founder of the trust’s estate, the question arises whether buying a home in a trust is still a viable option and whether this vehicle is the right one to look after the asset, says Lanice Steward, president of the Institute of Estate Agents of South Africa.
Over the years, different tax implications have been applied to trusts, with the latest being an increase from 27,3% of the gain to 32,8%.
The formula for calculating Capital Gains Tax as set out in the tax legislation is quite complicated but basically comes to a percentage of the total profit (gain) made by a tax payer. The previous rate for natural persons was 13.7%, 18.6% for companies and close corporations and for trusts was 27.3%. From 1 March 2016 the new rate is: 16.4% for natural persons, 22.4% for companies and close corporations and 32.8% for trusts.
The R2 million exemption on gains made on the sale of a person’s primary residence remains unchanged. The government budgets to receive an extra R1 billion of Capital Gains Tax from ordinary human being taxpayers and another R1 Billion from corporate tax payers in the coming year.
In addition to the increase in CGT, estate duty cannot be avoided as it is proposed that donations or loans to the trust must be included in the estate of the founding member, which eliminates the ability to avoid paying taxes on assets passed to the trust, said Steward.
Lastly, with regard to the Budget, the implication of increases in transfer duty on properties above R10 million from 11% to 13% could be a slight retardation in price rises in the top end of the market, where values have grown exponentially in recent years. The aim of this budget, it seems, is for it not to have a dramatic effect on the lower and middle end of the market which is usually the hardest hit in times of economic uncertainty, said Steward.
The question that is now asked is whether trusts still play a role in wealth protection?
“A trust is an excellent vehicle in which to protect minors in the event of the untimely death of both parents or to protect great wealth from being squandered by the next generation, but I do not believe that a trust should be seen as tax haven any longer,” said Steward. “They previously played a huge role in avoiding estate duty and transfer duties on passing property from one family member to another, but the government is tightening up on this and one can expect that there will be taxes placed on trusts going forward.”
If there is a question as to whether to buy property or place assets into a trust, this should be a decision made in conjunction with a tax lawyer or financial advisor, who would be able to make a learned decision on a family’s financial standing, said Steward.