When a decision is made to buy a property as a buy-to-let-investment, it is important to consider and plan what sort of strategy you, as the property owner, have in owning the property and then choose whether to own it outright or to register it in the name of a company or a trust.
This is according to Michael Bauer, managing director of IHPC, who says many people buy a property or a few properties to rent out, but don’t have a specific business plan and goal for the ownership of these properties. It should be decided beforehand whether this is meant to be a hobby or a business that will be built up over time, and whether the owner of these properties is likely to want to manage his properties himself.
If registering the properties in a company’s name, the costs of running the company should be borne in mind as it is not worth it, cost-wise, if you have only one or two properties that are being rented out. It might usually be decided to hold property in a company name because of the saving on the transfer duty when buying from a VAT registered entity, but the costs of running the company are higher and there are further costs when the property needs to be sold.
The company must be registered with the Companies and Intellectual Properties Commission (CIPC), and each year the company must submit annual returns (which are prepared and submitted by an auditor) with the CIPC within 30 days of the anniversary of the company’s formation. If this is not done, CIPC will assume that the company is no longer trading. Deregistration of the company will follow if the owner hasn’t submitted annual returns for more than two successive years, and if CIPC believes that the company has been inactive for seven years or more.
There are pros and cons to owning property in a company name, says Bauer. Higher transfer duty is paid initially and there are taxes payable by the individual members of the company, as well as the financial fees each year.
If the property is registered in a natural person’s name, it will be liable for Capital Gains Tax (CGT). The first R2 million is exempt from CGT if it is the owner’s primary residence, and if the properties are registered to a natural person there are no auditor or accounting fees payable each year.
The problem with this sort of registration is that second and subsequent properties will accrue CGT and on death of the owner, estate duty is payable if the property is registered in a natural person’s name. The benefit of owning a property in a personal capacity is that the income tax paid might be lower (as little as 18%) than the tax paid if the property is owned in a company or trust’s name. In addition to income tax, if property is owned in the company name, there will be dividend tax payable.
Trusts are best in estate planning, as there will be no transfer duty in passing the property on to heirs or members of the trust and no auditor reports are necessary each year, but the highest income tax is paid using this vehicle for owning property.
Bauer says when a decision is made to buy a property, the buyer must think through carefully what his end goal will be and what he intends doing with it. This way he can establish which entity to register it in. He should, ideally, consult his attorney and perhaps a financial consultant to establish which would be best for him, before he signs an offer to purchase, he says. The costs of running the entity should be justifiable in the amounts made in rent from those properties versus maintaining the structure.