22 November 2011

Tax relief for transfer of a residential property

Is your house in a company, close corporation (CC) or trust? If so, read on - it's important.

In the past, people bought their residential immovable property in companies, CCs and trusts, rather than in their own names for tax efficiency or asset protection. Since 2001, the tax benefits of holding residential property in legal entities have all but evaporated: First, companies, trusts and CCs pay a higher effective rate of capital gains tax (CGT) than natural persons. Second, natural persons who sell their primary residences pay no CGT on the first R1,5 million profit they realise when they sell their residences. Legal entities don't qualify for this break. Third, persons who buy interests in legal entities which own residential property pay transfer duty (a tax on the acquisition of immovable property) when they buy those interests - and not only when they buy the property from the entity concerned.

So, holding residential property in a legal entity may be a bad thing from a tax perspective. But what if your property is a company, CC or trust already? How do you unscramble the egg?

Fortunately, the South African Revenue Service (SARS) has offered relief: until 31 December 2012 persons who hold residential property in companies, CCs and trusts may transfer that property into their own names free of taxes, if they meet certain requirements.

Know that this is not a Do-It-Yourself exercise. You need to obtain advice from an attorney or other professional advisor to understand whether you meet the requirements for the relief, what the tax implications are, how to practically implement the relief, and to register the transfer in the Deeds Office.

Simply put, to qualify for the relief you must meet the following requirements:

  • The property in the company, CC or trust must be a residence. So, commercial property eg an office or warehouse does not qualify.
  • The residence must have been used mainly for domestic purposes from 11 February 2009 by persons who are (1) natural persons and (2) connected persons in relation to the company, CC or trust. Simply put, a shareholder holding 20% or more of the shares in a company is a connected person in relation to the company; any member of a CC is a connected person in relation to a CC; and any beneficiary of a trust is a connected person in relation to the trust. Practically, this means that the connected person had to live in the house himself; if he rented the whole house, or the larger part of the house to tenants, he will not qualify for relief. It also means that a second or third home used mainly for domestic purposes (eg a holiday home) may also qualify for the relief.
  • The company, CC or trust must dispose of the property to the natural person by 31 December 2012. This does not mean that the property must be registered in the name of the natural person in the Deeds Office by that date; but the parties must have signed some written agreement to transfer the property by that date.
  • The company or CC must be deregistered or wound up - or in the case of a trust be terminated - within six months of the disposal of the property. To do this, the entity must have disposed of all its assets and liabilities.

If the transaction is implemented properly, the parties should suffer no transfer duty, CGT or secondary tax on companies (STC). For CGT purposes, the transferee effectively "takes over" the CGT base cost of the residence.

However, bear in mind the following practical aspects:

  • The law does not provide for relief from donations tax. So, be very careful when implementing the transaction to make sure that donations tax does not arise.
  • The transfer of the property to the natural person may have estate duty implications for the natural person as the value of her estate may be increased.
  • If the company, CC or trust has registered a bond over the property, the bond would need to be cancelled and possibly refinanced in the name of the natural person.
  • If there are loans owing by or to the company, CC or trust these would need to be settled, otherwise the relevant creditor may suffer CGT or income tax if the loans are simply written off.
  • The relief does not apply to assets other than residential immovable property eg commercial immovable property, golf memberships and motor vehicles.
  • You need to think carefully about what the underlying cause for the disposal will be eg will it be a sale or a distribution?

You will need to pay conveyancing fees and charges to transfer the property.

If you think you are a contender for relief then (1) get professional advice and (2) remember the 31 December 2012 deadline.

(Legislation: Paragraph 51A of the Eighth Schedule to the Income Tax Act, 1962; section 64B(5)(kA) of the Income Tax Act, 1962; and section 9(20) of the Transfer Duty Act, 1949.)

Ben Strauss, Tax and Rekha Jaga, Real Estate

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