Currently in South Africa, there are four main ways in which a property can be bought.
Private companies buying immovable property pay transfer duty at the same rate as a natural person.
This is according to Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa, who says deciding in which legal entity to buy the property is not a decision that should be entered into lightly, as each has its pros and cons.
He says the law in South Africa recognises various types of ‘persons’, regarded as either natural persons or juristic persons. He says a natural person is a person who acts and conducts business in their own name, while a juristic person is a legal entity, such as a company, trust or close corporation.
Buying as a natural person
This is the most common means of buying a property and refers to buying a home in your own name as an individual, without representing any other legal entity. When buying a property as a natural person, transfer duty will be paid according to a sliding scale depending on the purchase price of the home.
Martin Potgieter, Attorney Notary and Conveyancer, says under the current legislation, homes priced from R0 to R750 000 are exempt of transfer fees, while properties priced between R750 001 and R1.25 million pay 3% on the value above R750 000.
Homes priced between R1 250 001 and R1 .75 million will pay R15 000 plus 6% of the value exceeding R1.25 million, properties priced from R1 750 001 to R2.25 million will pay R45 000 plus 8% of the value exceeding R1.75 million, and homes priced R2 250 001 and above will pay R85 000 plus 11% of the value exceeding R2.25 million.
Goslett says when it comes to Capital Gains Tax (CGT), provided the property is the owner’s primary residence, they will be exempt from paying any CGT on the first R2 million of any profit made on the sale of the property. Also, where the primary residence is sold for R2 million or less, the full capital gain will be disregarded. In terms of the Act, a primary residence is defined as a property which is owned by a natural person. The owner or their spouse must ordinarily reside in the property as their main residence and it must predominantly be used for domestic purposes.
According to Goslett, buying a property as a natural person is probably the most feasible option for the majority of home buyers, however, the downside of owning a property in your own name comes in when the buyer is self-employed or runs their own business.
“If at any stage the business owner is unable to pay their creditors, they run the risk of losing their property. Any properties they own will become prime targets to their creditors and can be taken away to mitigate loses.”
Another potential con is that, if the property is not the owner’s primary residence or is used for business purposes, the CGT exemption will not apply and estate duty is payable on death, he says.
Buying a property as a (Pty) Ltd
Private companies buying immovable property pay transfer duty at the same rate as a natural person. However, no transfer duty is payable by the seller if they are registered for VAT and the property forms part of the operations for which the seller is registered.
Should the property be sold as part of a rental portfolio or going concern such as a guest house, the deed of sale must contain certain specific provisions and may be zero-rated for VAT, which means no transfer duty or VAT is payable.
Goslett says private companies will pay a comparably higher CGT, with an inclusion rate of 50%, and an income tax rate of 28%, which translates into an effective CGT rate of 14%.
He says since companies don’t die, no estate duty is payable. Although, if an individual is a shareholder of the company, the value of the shares and the loan account are deemed as assets in his or her estate and the value as verified by the company’s accountant, together with any amount owing by way of loan account, will increase the value of his or her estate.
Also, a 10% secondary tax on companies (STC) of 10% is levied on all profits distributed in the form of dividends.
“If the company acquires the property with the intention of selling it to make a profit and does not keep the property for an indefinite period for rental purposes, the South African Revenue Service (SARS) may regard the investor as a dealer and levy income tax at the investor’s tax rate on the profit. If income tax is applicable, then no capital gains tax will apply.”
According to Goslett, a significant benefit of this form of ownership is that a private company can accommodate a maximum of 50 shareholders, which can include private individuals, trusts and companies.
He says because the company is a separate legal entity, there is some protection afforded to shareholder’s assets, which can only be attached to cover debts incurred by the company if the individual has stood surety for the company. Most financial institutions will insist that shareholders sign personal suretyships in respect of any loans made by the financial institution to the private company.
Buying a property as a close corporation
Although the introduction of the Companies Act of 2008 phased out many close corporations, existing close corporations could elect to continue to exist until deregistered, dissolved or converted into a private company governed under the new Companies Act.
Close corporations face the same transfer duty, CGT and tax implications as companies. Like a company, a close corporation is also a separate legal entity.
Goslett says the only difference between buying in a close corporation and a company is that close corporations are governed by the Close Corporations Act 69/1984, they are managed by members, ownership is restricted to a maximum of 10 natural persons and the financial statements have to be prepared by an accounting officer: there is no need to provide audited financials, which substantially brings down the administration fees.
While another close corporation or company cannot be a member of a close corporation, a trust can be registered as a member of a close corporation.
Buying property as a trust
A trust is established by a founder or settlor, trustees and beneficiaries. The individual that forms the trust is referred to as the founder or settlor of the trust. The founder will appoint trustees in terms of the Trust Deed who will manage the affairs of the trust for the benefit of the beneficiaries that are named in terms thereof.
According to Goslett, a property held within a trust will not form a part of an individual’s estate when they pass away, which means that the estate will benefit from estate duty savings.
Another benefit is that since the trust is a separate legal entity, the property held within the trust is protected from being attached by creditors of the beneficiaries. This provides a safe option to protect assets.
Other benefits include the fact that there is no executor fees when the owner dies, as there is no need to transfer the property from the deceased into the name of their heir. All repairs and maintenance, as well as other bills such as water and rates will be for the trust’s account.
The downside of buying a property in a trust is that it attracts the highest rate of CGT, with an inclusion rate of 50%, and income tax rate of 40%, meaning an effective CGT rate of 20%.
Another con is that the founder does not have control over the property, as the trust will be the legal owner of the property and the trustees will have the power to administer it. Goslett says if financing is required to buy the property, banks are less likely to grant a 100% bond to a trust and may require a higher deposit. (Book an appointment with one of the IGrow Tax & Trust Specialists today!)
“Depending on the investment structure that is used when buying a property and the varying tax and legal implications that may be applicable, it is advisable for the buyer to consult with legal experts to explore all their options before making their final decision.”