A primary residence is the place where a person ordinarily resides and is used mainly for domestic purposes. Before buying a home in a trust careful consideration should be given to the reasons for doing so, and in particular, the advantages and disadvantages must be weighed up.
The reasons often advanced for purchasing a primary residence in a trust are asset protection and estate planning. Buying the family home in a trust will protect it from personal creditors and business risks. It will also reduce the value of a person’s estate and the estate duty that it will be subject to.
There are however other factors that should be considered. When natural persons sell their primary residence, they are entitled to a R2 million exemption on any capital gain. If a natural person exceeds their R2 million exemption, the excess will be taxed at an effective rate of up to 18%. This saving on capital gains tax does not apply if the primary residence has been purchased in a trust. The full capital gain will either be taxed in the trust at an effective rate of 36% or if distributed to the beneficiaries, be taxed at a lower rate in their hands.
If the trust does not have the funds to purchase the property, the purchase price will need to be advanced to the trust thus creating a loan account. Such a loan will be exempt from the deemed donations tax provisions in section 7C of the Income Tax Act. But how will the loan be repaid if there is no income generating asset in the trust? This will be counterintuitive to estate planning objectives as the loan will remain as an asset in the lender’s estate subject to potential estate duty.
Purchasing a primary residence in a trust effectively means that control of the property is relinquished to the trustees. If you are not prepared to do this, a trust is not for you. You must also be prepared for the additional administration and compliance that comes with a trust. The trustees must open and operate a bank account, register the trust for tax, file annual tax returns, ensure proper bookkeeping and accounting systems are in place, and keep records of the beneficial ownership and report any changes to the Master.
Forewarned is forearmed. Before buying a primary residence in a trust, obtain professional advice, and ensure all relevant factors have been considered.
Telephone: +27 31 570 5496, Email: email@example.com