Trans­fer a home from a com­pany or trust tax-free

If you put a res­i­den­tial prop­erty into a com­pany or a trust be­fore Fe­bru­ary 11 this year, you now have an op­por­tu­nity to trans­fer the prop­erty back into your own name without fac­ing a tax bill. Laura du Preez re­ports on the con­di­tions that ap­ply to the of

Weekend Argus (Saturday Edition) - - GOODPASTIMES -

If you have a res­i­den­tial prop­erty in a com­pany, a close cor­po­ra­tion (CC) or a trust and you would like to trans­fer it into your own name, now is the time to do so.

The Tax­a­tion Laws Amend­ment Act, which was pro­mul­gated at the end of Septem­ber, gives you un­til the end of 2011 to trans­fer res­i­den­tial prop­erty that you use mainly for do­mes­tic pur­poses into your own name without any tax con­se­quences.

The win­dow pe­riod, which in terms of the ini­tial pro­pos­als was sup­posed to op­er­ate from Jan­uary next year, has been ex­tended. It will now ap­ply ret­ro­spec­tively to a prop­erty trans­ferred from a com­pany, CC or a trust into your own name since Fe­bru­ary 11 this year, when the re­lief mea­sure was an­nounced in the Bud­get.

Dur­ing the win­dow pe­riod, you can trans­fer the prop­erty into your own name without pay­ing trans­fer duty, the com­pany or CC will not have to pay cap­i­tal gains tax (CGT) or secondary tax on com­pa­nies (STC) on the trans­fer, and the trust will not have to pay CGT on the trans­fer.

If you take up the of­fer, any CGT that oth­er­wise would have been levied on the com­pany, CC or trust will ef­fec­tively be de­ferred un­til you dis­pose of the prop­erty.

The base cost at which the com­pany, CC or trust ob­tained the prop­erty will be re­garded as your base cost for CGT pur­poses.

A sim­i­lar win­dow pe­riod was made avail­able in 2001 and 2002 with the in­tro­duc­tion of CGT and ahead of changes to the Trans­fer Duty Act.

TRUSTS NOW IN­CLUDED

Dur­ing feed­back on this year’s ini­tial pro­posal to al­low you to trans­fer res­i­den­tial prop­erty out of a com­pany and into your own name, tax ad­vis­ers said many peo­ple who had prop­erty in a trust had not taken ad­van­tage of the first op­por­tu­nity to trans­fer prop­erty into their own name and still wished to do so.

The pro­posed tax-free trans­fer was thus ex­tended to in­clude peo­ple with prop­er­ties in trusts who want to trans­fer the prop­er­ties into their own names, as was the case in 2001 and 2002.

A fur­ther rea­son you are be­ing of­fered this win­dow pe­riod is be­cause an­nual fees are im­posed on com­pa­nies un­der the Com­pa­nies Act, and the fees can be avoided if the prop­erty is trans­ferred into your own name and the com­pany is dereg­is­tered.

Kemp Mun­nik, a tax di­rec­tor at au­dit­ing and ac­count­ing firm BDO, says the tax-free trans­fer has been ex­tended to in­clude prop­erty used mainly for do­mes­tic pur­poses, in­stead of be­ing re­stricted to prop­erty used ex­clu­sively for do­mes­tic pur­poses.

The orig­i­nal pro­posal ex­cluded prop­erty own­ers who main­tain an of­fice or a stu­dio at home, let a gar­den flat or who take in a pay­ing guest.

Mun­nik says once the prop­erty is in your own name, not only will the ef­fec­tive tax rate be lower, but you will en­joy CGT re­lief of up to R1.5 mil­lion on the gain you make when you dis­pose of the prop­erty as your pri­mary res­i­dence. Trusts, com­pa­nies and CCs do not en­joy this re­lief.

SOME PROP­ER­TIES EX­CLUDED

Mun­nik says al­though the re­lief has been ex­tended to res­i­den­tial prop­erty held in a trust, it will not ap­ply to a res­i­den­tial prop­erty held in a com­pany that in turn is held by a fam­ily trust.

Also, the re­lief will ap­ply only to a res­i­dence do­nated to a trust by you, as the res­i­dent of the prop­erty, or if you fi­nanced the ac­qui­si­tion of the prop­erty.

You will not en­joy re­lief if your res­i­den­tial prop­erty is held in a trust and the trust has raised a mort­gage bond to fi­nance the prop­erty and pays the bond out of its own means, Mun­nik says.

The leg­is­la­tion refers to the prop­erty be­ing your “or­di­nary res­i­dence”. Prop­er­ties that are not used as an “or­di­nary res­i­dence” (for ex­am­ple, a hol­i­day home or a va­cant plot) will not qual­ify for the re­lief, he says.

Mun­nik says the prop­erty need no longer be a com­pany’s sole as­set, nor will it be nec­es­sary to liq­ui­date the com­pany af­ter the dis­posal of the prop­erty, as was pro­posed orig­i­nally.

To qual­ify for the re­lief, you must have put your home into a trust, CC or com­pany be­fore Fe­bru­ary 11 this year.

STC EX­EMP­TION TO GO

David Warneke, a tax part­ner at Cameron and Pren­tice Char­tered Ac­coun­tants, says if you have prop­erty in a com­pany or a CC, you should be aware that the ex­emp­tion from STC when you dereg­is­ter the com­pany will fall away with the in­tro­duc­tion of div­i­dends tax, which will re­place STC prob­a­bly late next year or in early 2011. This could pose a prob­lem if you bought the prop­erty through a com­pany be­fore CGT was in­tro­duced in Oc­to­ber 2001.

Warneke says if you bought a shelf com­pany be­fore Oc­to­ber 2001 and the shelf com­pany then ob­tained a prop­erty, the in­crease in the value of the prop­erty be­tween the pur­chase date and the date on which CGT was in­tro­duced is known as pre-2001 em­bed­ded value.

For ex­am­ple, he says, if you bought a prop­erty for R1 mil­lion in 1991 and in Oc­to­ber 2001 the prop­erty was worth R3 mil­lion, the pre-2001 em­bed­ded value is R2 mil­lion.

Warneke says if the com­pany now sells the prop­erty for R5 mil­lion and is dereg­is­tered, no STC will be payable on the pre-2001 em­bed­ded value, and STC will be levied only on the in­crease in value from Oc­to­ber 2001 un­til the date of dis­posal – that is, on the in­crease from R3 mil­lion to R5 mil­lion (R2 mil­lion). But this will change when div­i­dends tax is in­tro­duced, as the ex­emp­tion re­gard­ing the pre-2001 em­bed­ded value will fall away.

Af­ter div­i­dends tax is in­tro­duced, the full in­crease in the value of the prop­erty (R4 mil­lion in the ex­am­ple) will be­come sub­ject to div­i­dends tax, which would amount to R400 000 (10 per­cent of the pro­ceeds of R5 mil­lion less the cost of R1 mil­lion).

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