Lanice Steward, MD of southern suburbs/Atlantic seaboard estate agency Anne Porter Knight Frank, says trusts can have merit as an alternative vehicle through which a home can be bought.
“Trusts as holding vehicles for property are still eminently suitable where the estate is large or requires protection from hasty or irresponsible action by one or more of the potential beneficiaries,” Steward says.
Holding the property in a trust also gives the trustees the chance to peg the value of the property, which can have benefits in estate planning.
However, Steward says the disadvantage of this type of holding vehicle is that the transfer duty (at 10%) will be higher than that for an individual (8%).
Capital gains tax will also be payable at 50% of the capital gain.
The income tax rate for a trust is 40%, which means it will pay 20% of the capital again as opposed to 14% for a company or close corporation.
Purchasing through a company or a close corporation, says Steward, used to have the benefit that tax was paid on transfer of the shares, not on the property. This brought about a significant saving but this tax ruling was changed and the transfer duty is now the same as for an individual.
However, if the company is registered for VAT and the property is bought for development purposes, the owners can claim back the VAT payment.
The big disadvantage of a company as a holding vehicle, says Steward, is that its books have to be professionally audited by a qualified chartered accountant each year — even when there has been no business during that year — and this can be very expensive. This has been a chief reason for people taking advantage of Sars’s window of opportunity to convert to individual ownership.
Another vehicle now frequently used by property investors and young couples or other new income earners anxious to get a foothold in property is partnership buying. Here two or more parties agree to buy property and, if they are wise, employ a lawyer to draw up a clearly worded agreement which establishes how they will determine the value should one of them wish to realise the asset.
When there is a disagreement on the value, says Steward, it can help to ask three estate agents to value the property and then take an average price.
Alternatively, it may be wise to employ a sworn valuator — but here again there is no guarantee that the other partner will accept the valuation.
Steward says before buying people should think wisely about which vehicle would best suit their requirements. — Businessday.