12 November 2011

Transfer duty bonanza

The Taxation Law Amendment Bill (B19-2011) proposes changes to the rates of transfer duty from 23 January 2011.

First, the rates are reduced. Persons who acquire immovable property pay transfer duty as follows: nil where the value or price is less than R600,000; 3% on the amount of the value or price between R600,000 and R1 million; 5% on the amount or value between R1 million and R1,5 million; and 8% on the amount of value above R1,5 million.

Second, the above rates now apply to all persons. Before the proposed change, natural persons paid transfer duty on a sliding scale, while other persons (companies, close corporations (CCs) and trusts) paid transfer duty at a fixed rate of 8% from the first rand of value or price.

What's the catch? Why did SARS grant this relief to persons other than natural persons?

The reason is that, purely from a tax perspective, it may no longer be efficient to hold immovable property - particularly residential immovable property - in a company, CC or trust. First, a company, CC or trust does not qualify for the R1,5 million primary residence exclusion (which, simply put, provides that the first R1,5 million profit on the sale of a primary residence is free of capital gains tax). Second, if you sell the shares in company, or member's interest in a CC that owns residential immovable property, the sale of the shares or interest triggers transfer duty in any event.

But, as SARS recognises, there may be reasons not related to tax why a person would place immovable property in a company, CC or trust. For instance, a person may place property in a company to enjoy the protection of limited liability.

Further, a person may also buy an asset like a holiday home in a trust if the person wants to secure that asset for future generations - when the person dies, the trust continues and there is no tax event on his or her death (except, for instance, in respect of a loan account held by the person if it funded the trust to enable the trust to buy the property).

The lower transfer duty rates for persons other than natural persons provide some planning opportunities. But take care to avoid tax headaches in future.

Ben Strauss

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