Option one is default – most people buy a property into their own name. Very simple, it’s in your name. The problem is if you run in to trouble you could lose your home. If you pass away, property is caught up in your frozen estate. Your spouse, your dependents, other persons, children, don’t have access to this asset until such time as your estate is wound up. That could take anything from about eight, nine months to one, two, three, four, five years. You’re going to be creating serious hardship for whoever’s going to be needing to access that property or the rentals, or whatever the case is. It’s a pretty expensive exercise to die, so try and avoid it at all costs, but your death will cost you capital gains tax. The maximum rate at this point is 13.6%. It’s a fairly huge chunk that’s going to be coming out of any growth of the property, so one must bear that in mind if the property’s in your name, on your demise.
On top of that, your estate – not you – will be subjected to executors fees also at a maximum legislated rate of 3.5% plus VAT, just under 4%. Again, a massive chunk. And the kicker here is for you to consider that this is a charge on the gross value, not on the net value. Suddenly, that’s a massive cost on a small percentage. This seems pretty harmless.
Other options are closed corporation, or Pty Limited. A lot of people do consider this as an option because it is a known type of entity. SARS pretty much has settled the taxation around this, so there’s some level of comfort. The problem with this is a closed corporation or company is not the ideal residential property owning entity because you will eventually pay too much tax as well compared to a Trust.
Pty CC, your tax rate is 28% to get the cash out of the company, or the CC you’ll be paying a further dividends tax, bringing you effectively to a tax rate of 38.8%. Also, a default position is you can have a Trust owning a company that, in turn, owns your property. You are creating extra costs which you can possibly avoid by having a more simplified structure. Not a great structure – a CC or Pty – if you are ever selling a property because you’re going to end up with a huge capital gains tax problem in the company of the CC at an effective rate of 18.6%. To get your hands on the profits after tax, costs you a further dividends tax of 15%, bringing your total tax bill to just under 31%, so that’s ouch. In your personal name, the tax is a little bit better, but you have exposure to creditors, you have got issues on death, you have no continuity. CC Pty is solving some of the problems, but not ideal from a tax perspective.
Then, we come to the mythical Trust. Default position though is it’s an old entity, it’s been around forever, in this country almost 200 years. A Trust very simply is like a vault. You’re going to acquire your property into this entity. The tax is brilliant in this structure because you can move the income out of a Trust. Even though it is an entity with the highest tax rate at 41% after the new budget a couple of weeks ago, the Trustees have got the election to push any rental income down to beneficiaries, who then pay at their own marginal rates. Also, capital gains tax wise, if you distribute your gain to a beneficiary, it’s going to be quite tax effective.