There are three different forms of homeownership in South Africa which include owning a home as a natural person, a company or, as a trust. Each option has its own set of pros and cons and it is important to understand each option before proceeding with the purchase.
Purchasing property as a ‘natural person’
This is by far the most common option. It means the home will be registered in your name as an individual without representing any other legal entity. When purchasing property as a ‘natural person’, transfer duty will be paid according to a sliding scale depending on the purchase price of the home explains Adrian Goslett, Regional Director and CEO of RE/MAX Southern Africa.
Below refers to the 2020 Budget Speech for the period between the 1st of March 2020 and the 28th of February 2021:
A benefit of purchasing as an individual is that paying Capital Gains Tax (CGT) can be avoided provided the property is the owner’s primary residence. The definition of a primary residence is ‘a property which is owned by a natural person, the owner or their spouse ordinarily resides within the property as their main residence and it is predominantly used for domestic purposes’.
“In this instance, the homeowner will be exempt of paying any CGT on the first R2 million of any profit made on the sale of the property. Also, where the primary residence is sold for R2 million or less, the full capital gain will be disregarded,” Goslett explains.
The downside of this form of ownership only arises if you run your own business. “As a business owner, if you run into financial trouble, you risk losing your home. Any properties you own will become prime targets to creditors who want to mitigate their loses. Another possible con is that, if the property is not your primary residence or is used for business purposes, the CGT exemption will not apply, and estate duty is payable on death,” Goslett points out.
Purchasing property as a company
A private company that purchases an immovable property will pay transfer duty at the same rate as a ‘natural person’. When a company decides to sell the property, no transfer duty will be payable by the seller if they are registered for VAT and if the property forms part of the operations for which the seller is registered.
If the property was sold by a company as part of a rental portfolio or as a guest house, the deed of sale must contain certain specific provisions and may be zero-rated for VAT, which would also mean that no transfer duty or VAT is payable by the seller.
However, as a private company, Goslett warns that owners will pay comparably more CGT, which is currently at a rate of 22.4%. On the upside, Goslett explains that because a company is not a person who can die, no estate duty is payable.
Things get slightly more complicated if someone is a shareholder of the company that owns the property.
The value of the shares and the loan account are then deemed as assets in their estate and the value (as verified by the company’s accountant) together with any amount owing by way of the loan account, will increase the value of the estate.
A 20% Dividends Tax is payable on all dividends paid to shareholders. Dividends tax is withheld from shareholders’ dividend payment by a withholding agent (either the company paying the dividend or, where a regulated intermediary is appointed).
Because the company is a separate legal entity, there is some protection for the shareholder’s assets. While most financial institutions will insist that shareholders sign personal suretyships in respect of any loans made by the financial institution to the private company, the shareholder’s assets can only be attached to cover debts incurred by the company. This allows buyers who purchase a company some protection of their own personal assets.
Purchasing property through a trust
While the cost of starting a trust can be significant, purchasing a property through one has certain advantages.
“A trust is often used to protect the assets and ensure that the appointed beneficiaries, which are more often than not the trust founder’s children, get the benefit of using the assets if something happens to the trust founder,” Goslett explains.
A property held within a trust will not form part of an individual’s estate when they die which means the estate will benefit from not having to pay estate duties and executor fees. As a separate legal entity, the property held within the trust is protected from being attached by creditors of the beneficiaries. All repairs and maintenance, and other bills such as water and rates, can be billed to the trust’s account.
The main downside is that a trust attracts the highest rate of CGT which is currently at a rate of 36%. Another potential con is that the founder does not have control over the property, as the trust will be the legal owner and the trustees will have the power to administer it – much like a homeowners’ association (HOA) or body corporate that runs a sectional title estate.
Because of the various tax and legal implications that are applicable when selecting the right vehicle in which to purchase property, Goslett recommends that the purchaser should consult with a legal expert and a tax consultant to explore all consequences of each option before making their final decision.