Buying property in a Trust

Definition

A Trust in the narrow sense refers to the legal institution where an intermediate person/s, the trustee/s, holds property as owner thereof in his /her capacity as trustee in accordance with the expressed wishes of another person, the settlor or founder, not for his/her personal benefit but for the benefit of named or ascertainable beneficiaries or for an impersonal object. In other words if you form a Trust you are known as the Founder/Settlor of the Trust, and you will appoint trustees in terms of the trust deed to manage your affairs for the benefit of the beneficiaries that you also name in terms of the trust deed.

• Registration: At the Master of the High Court, who issues Letters of Authority in favour of the trustees. There must be at least 1 independent trustee.
• Established by a Deed of Trust
• Parties to Deed of Trust: Founder/Settlor, Trustees, Beneficiaries
• Administered by trustees, with powers as specified in the Deed of Trust
• No audit requirements, although it is essential to administer trust properly, to avoid courts "looking through" the Trust and deeming it to be the founder's property
• Pays transfer duty at the same rate as natural persons from 23 February 2011
• Capital gains tax:
  Inclusion rate: 50% Income tax rate: 40% Effective rate: 20%
  If the capital gain is awarded to the beneficiary, he/she will pay CGT at his/ her effective rate of 0- 10% - proper administration of the trust is essential.
• Trusts do not die, therefore no estate duty is payable. Any shares in a company or members interest in a close corporation owned in the Trust, or any other assets (if owned directly) are owned by the Trust and are not assets in the estate of the individual and therefore do not increase the estate duty payable by the individual on death.

Other Tax Considerations:

VAT:

No transfer duty is payable if the seller is registered for VAT (and the property is part of the operations for which the seller is registered), but VAT at the rate of 14% is payable. If the contract does not specify that the VAT is to be paid over and above the purchase price, then it is deemed to be included in the purchase price.

If the property is sold as a rental enterprise or as a going concern e.g. a guesthouse, the deed of sale must contain certain specific provisions and may be zero rated for VAT. This means that no transfer duty or VAT is payable. Please click on to the precedent contract for the purchase of commercial property under step 5.

If the purchaser registers for VAT, then the Vat (or the transfer duty) can be claimed back as an input credit in certain defined circumstances.

Income Tax:

If a property investor does not acquire a property with the intention of holding it for an indefinite period or for rental purposes, but with the intention of selling it to make a profit, then SARS may well regard the investor as a dealer and levy income tax at the investor's tax rate on the profit. Capital gains tax will not apply if income tax is payable.

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