There are a number of legal and tax implications that need to be considered when using a company or a trust to buy property. Fhumulani Denga, Senior Associate, and Sibusiso Pholwane, Candidate Attorney of CMS South Africa—the SA arm of the global CMS full-service commercial law firm—provide answers to the most frequently asked questions.
Q1: Can you buy a home using a company or a trust?
The short answer is yes! Section 1 of the Companies Act 71 of 2008, read together with Section 19(1)(b), confirms that both companies and trusts in South Africa are considered to be juristic persons. As such, they have all of the legal powers and capacity to enter into a sale agreement and ultimately become the registered owner of immovable property … but with certain limitations.
However, just because you can doesn’t always mean that you should! Consulting a conveyancing attorney and a tax practitioner is always advisable before buying immovable property through a company or trust, as they both have varying estate planning, tax, and legal implications.
Q2: What are the major differences between the two?
Companies are governed by the Companies Act 71 of 2008 and are constituted through a memorandum of incorporation. The day-to-day management of a company is by the directors of the company, who act for the benefit of the shareholders. The ultimate beneficial owner of a company is, therefore, the shareholders confirmed by the company share certificates and share register.
Trusts are governed by the Trust Property Control Act 57 of 1988 and are constituted through a trust deed. The trustees attend to the management of the trust for the benefit of the beneficiaries. The founder, trustees, and beneficiaries specifically named in the trust deed (vested trusts), or generally referred to as members of a class of beneficiaries (discretionary trusts), are considered to be the ultimate beneficial owner of the trust.
Q3: What are the pros and cons, be that a company or trust?
Purchase property through a company:
Pros
Easy to secure financing, to incorporate, and to set up.
Shareholders and directors may enjoy limited personal liability.
Lower tax implications.
Greater flexibility for commercial activities.
Cons
Deceased shareholders may have estate duty implications.
Capital gains tax (CGT) implications and dividends tax if profits are distributed.
Costly administrative requirements, e.g., annual Companies and Intellectual Property Commission (CIPC) filings, tax returns, potential audits, and regulatory compliance.
Purchase property through a trust
Pros
Beneficial for estate planning and reducing estate duty exposure as property is excluded from the founder's or beneficiaries’ estates.
Trusts offer protection from creditors.
Provides continuity of existence for financial and estate planning.
Cons
Higher tax implications
More expensive to set up in comparison to a company.
Decisions are solely made by the trustees, which can cause power imbalances with the founder and beneficiaries.
Financing limitations, as banks generally require sureties if approved.
Q4: What are the tax implications?
Transfer duty or VAT is always payable when transferring immovable property. This is the case regardless of whether the immovable property is being purchased by an individual, trust, or company and is governed by the Transfer Duty Act 40 of 1949 or the Value-Added Tax Act 89 of 1991.
This tax is payable by the purchaser to SARS upon the transfer of immovable property and is calculated on a sliding scale.
The income tax of companies is taxed at a flat rate of 27% on their taxable profits. Trusts are taxed at a flat rate of 45% on taxable income retained in the trust.
In instances when trusts and companies act as sellers, they may both be liable for Capital Gains Tax (CGT), which is a tax payable on the profit sellers make when disposing of immovable property, shares, or investments for more than the acquisition amount (if applicable). CGT is calculated at a rate of 36% for trusts, while companies are at a rate of 21.6%.
Deceased shareholders and beneficiaries may be subject to estate duty at a rate of 20% on the dutiable portion of the estate up to R30-million, and 25% on any value exceeding R30-million (where applicable).
In addition, withholding tax is charged at a flat rate of 20% on dividends paid by South African resident companies to shareholders (unless an exemption or reduced rate applies).
Q5: How easy/challenging is it to sell in the future?
Trusts and companies can easily facilitate the sale of immovable property with relative ease, provided their internal governance structures and compliance obligations are properly maintained. If the company’s records with the CIPC and SARS (e.g., annual returns filed, tax compliance, relevant resolutions) are up to date, and the trust’s records with the Master’s Office (e.g., letters of authority, trustee appointments, the trust deed, and financial records) are in order, neither vehicle poses a challenge when selling in the future, if appropriately managed. The choice between the two ultimately rests on the client's preference.
However, the efficiency with which a trust is administered is often subject to the responsiveness of the relevant Master’s Office, which may result in significant delays during a future sale and should be borne in mind. Appropriate legal and tax due diligence considerations are essential when selling in the future to mitigate potential risks and liabilities.
Q6: What is stated on the deed?
The title deed will reflect the registered name and registration number of the owner. For a company this will be the registered name and registration number of the company, as recorded with CIPC. In the case of a trust, this will be the name and registration number of the trust as per the trust deed.
Q7: What are the financial implications of the transfer and costs involved, especially if there is an existing bond on the property?
Apart from transfer duty or VAT (as applicable), purchasers will incur transfer costs calculated on a sliding scale according to prescribed tariffs based on the property's purchase price. Where financing is secured, bond costs will also apply, calculated on a sliding scale.
Where there is an existing bond, the seller will be responsible for bond cancellation costs in addition to rates and levy clearance figures and the estate agent's commission (if applicable).
Q8: Who facilitates these types of purchases?
An estate agent typically facilitates the conclusion of a sale agreement, while a conveyancing attorney is responsible for managing the transfer process through to registration of the property in the Deeds Office.
