Huge tax breaks on properties not for all
New tax window period to transfer properties held in trusts – what no one told you …
Many people are interested in taking advantage of the new Sars tax concession that provides a window period for transferring properties currently held in trusts, into their personal names, as provided for in Paragraph 51 of the Eighth Schedule of the Income Tax Act 1963.
Paragraph 51, as introduced by the Taxation Laws Amendment Act No. 17 of 2009, offers a special roll-over concession for when a natural person (which includes his or her spouse or both) acquires, in certain circumstances, a domestic residence from a Company (including a Close Corporation) or Trust.
The Explanatory Memorandum stated that the reasons for the new window period are, as quoted verbatim,:
Prior to 2001, many natural persons historically utilised companies or trusts to purchase their domestic residence. This form of holding avoided the imposition of transfer duty without adverse tax consequences. Capital Gains Tax (“”CGT””) was introduced in 2001, thereby creating a potential dual level charge. The residential property company anti-avoidance rules (introduced in 2002) also eliminated the transfer duty benefits of the company/trust holding structure. Secondary Tax on Companies (“”STC) -free treatment for capital profits was additionally limited to pre-2001 capital profits. In view of these changes, a limited window period was granted to provide the opportunity to transfer a residence out of a pre-existing company/trust structure. This window period eliminated all CGT, STC and transfer duty adverse consequences. This window period has long since expired. Upon review, it has been determined that many taxpayers should have availed themselves of this window period relief but have failed to do so.
It is thus proposed that tax relief granted under the previous window period of opportunity will be restored for another window period. However, under the renewed relief, the distribution will operate as a roll-over so that all gains or losses will be deferred. The new roll-over rule replaces the previously granted market value step-up. Companies or trusts will qualify for relief under these provisions on similar terms as granted under the previous window period. Like the old regime, the distribution of a primary residence by a company or trust will be exempt from Transfer Duty and STC. However, to the extent the Dividends Tax falls within the renewed window period, the distribution will be exempt from the Dividends Tax.
The roll-over applies when:
a. the natural person acquires the residence from the company or trust before January 1 2012, and
b. (i) the natural person alone, or together with his or her spouse, have directly held all the share capital or members interest in the company from February 11 2009 to the date of registration in the deeds registry of the residence, or
(ii) where he or she disposed of the residence to that Trust by way of donation, settlement or other disposition or financed all the expenditure included in its base cost actually incurred by the Trust to acquire and to improve the residence; and
c. the natural person alone or together with his or her spouse must personally and ordinarily have resided in the residence and used it mainly for domestic purposes as an ordinary residence from to the date of that registration; and
d. in respect of so much of that land, including unconsolidated adjacent land, as does not exceed two hectares.
Special attention must be given to the requirements set out in the second part of b(ii), being:
“”Where he or she… financed all the expenditure included in its base cost actually incurred by the trust to acquire
to improve the residence”” [our emphasis].
The expenditure comprising base cost refers to paragraph 20 of the Eighth Schedule which, for instance, includes the expenditure actually incurred in respect of the cost of acquisition, transfer costs, transfer duty or similar duty, the cost of maintaining, repairing, protecting or insuring, and rates or taxes on that property etc. (Please note that this list does not include all expenditures contained in Paragraph 20, but rather highlights some). Therefore, for instance, if the acquisition was financed by way of a mortgage bond or, for instance, the father-in-law financed the improvement of a granny flat, this would appear to disqualify the Trust from the special rollover concession.
We are advised that the Taxation Laws Amendment Bill for 2010 due to be released on May 10 2010 will contain a rewrite of paragraph 51 as it is has been acknowledged by Sars and National Treasury that there are problems herewith and it is, therefore, to be amended.
Unfortunately, the relief does not appear to apply where the residence is owned by a company or close corporation which is, in turn, owned by a trust.
Our advice, therefore, is not to rush into this type of transfer as yet but to wait until certainty has been obtained. The deadline for transfer is currently set as December 31 2011.
It is always recommended that professional advice is sought on whether it is wise to transfer a residential home from a trust, especially where this was established in a proper estate planning exercise as there are still various benefits in having your property in a Trust, such as :
i. the assets in the Trust are protected against personal creditors;
ii. the growth of the asset is pegged in the Trust, with consequent estate duty savings.
iii. Trustees have the flexibility of distributing Trust assets to specific beneficiaries as and when their personal circumstances require it preventing any future estate duty problems.
Please note, however, if any person, other than the natural person in question and their spouse, financed the residence, the concession is currently not available.
In addition, the deemed disposal of the interest, the base cost expenditure, and allowances being recovered or recouped, are not dealt with here but should you need any assistance with this, please contact us for details of our in-house tax experts who will gladly assist.
Once we have had the opportunity of reviewing the rewrite of paragraph 51, we will hopefully be in a position to provide more clarity on the way forward which will enable us to outline the steps needed and documentation required when instructing your attorney to transfer your residence from a Company, Close Corporation or Trust, as well as the process involved thereafter.
All material subject to our Legal Disclaimers.