I am often asked whether it is better to purchase property in a company or a trust, than in your personal name.

This depends on your individual financial planning needs and what your medium- and long-term intentions are.

There are some important issues that need to be considered, such as capital gains tax, income tax and estate duty implications, before a decision can be made.

You may also want to protect the property from creditors (if your business goes belly up) or consider the advantages or disadvantages of registering the property in the name of your spouse. These are all issues for you to discuss with your attorney when devising a well thought out estate plan.

Residential Properties

Capital gain arises when you dispose of an asset on or after 1 October 2001 for proceeds that exceed its base cost.

It is normally best to buy your private dwelling in your own name, to take advantage of the capital gains tax (CGT) exemption. If your primary residence is registered in your own name (or is owned by you and your spouse, jointly), when you sell, you will qualify for the R2m CGT rebate (primary residence exclusion) where the proceeds on the disposal of the property exceed R2m.

What is a “primary residence”?

There are two basic requirements which must be met before a home may be considered a primary residence, namely:

• it must be owned by a natural person (not a trust, company or close corporation); and
• the owner or spouse of the owner must ordinarily reside in the home as his or her main residence and must use the home mainly for domestic purposes.

Example of primary residence gain

An individual’s primary residence is valued at R1m on 1 October 2001 (when CGT kicked in). The residence is sold on 1 December 2014 for R3.5m. The gross gain is R2.5m. If one deducts the primary residence exclusion of R2m, the capital gain is R500k. (This example does not include improvements over the years, such as a swimming pool, that should be added to the base cost).

If your primary residence in not in your name, when you sell as a company, CC or Trust, the sale will attract a combination of capital gains tax, transfer duties, secondary tax on companies or the new dividends tax on companies.

For more information, go here: http://www.sars.gov.za/TaxTypes/CGT/Pages/default.aspx

Leisure properties

From an estate planning approach it would be advisable to buy the property in the name of a trust. In this way, any growth in the company is in the hands of the trust and not in yours. The growth is excluded from your estate for estate duty purposes and you can mitigate your tax liability with specific reference to income tax, CGT, donations tax and transfer duty. An obvious downside is that all trusts are taxed at an income tax rate of 40%, often higher than an individual would pay.

ABC of Capital Gains Tax for Individuals (pdf.)