Property Ownership - Company, Trust or Individual?

Private Property South Africa
Erina Botha

 A well-planned strategy is key to building a property portfolio that will create sufficient residual income for your needs. An important part of that strategy is to decide whether individual, company or trust ownership will best suit your purposes.

Choosing the right legal entity could save you millions over the years. It can cost you dearly having to rectify an entity ownership mistake down the line, as transferring a property from one legal entity to another will attract one or more forms of tax, bond registration costs and various administrative and legal fees all over again.

Historically it has been almost conventional wisdom to house one's investments – be they properties, listed or unlisted investments – in a company. However, over the past ten years tax and company legislation have changed considerably.

We asked advice from the experts who gave us guidelines about factors to consider - such as different tax rates for the different entities, capital gains tax (CGT) and secondary tax on companies (STC).

TAX RATES AT A GLANCE
INCOME TAX RATE EFFECTIVE CGT RATE
Trusts 40% Trusts 20%
Companies & CC’s 10-29% plus 10% STC Companies & CC’s 14.5%
Individuals 18-40% Individuals 10%

The consensus is that the balance in residential property investment has tipped away from companies in favour of trusts and individuals. Properties you want to hold for long-term residual income are best kept in an investment trust. However, your primary residence and property acquired for speculation are probably best held in your personal capacity, according to our experts.

Property Trust - Advantages

  • The trust is not liable for debt incurred by any of the trustees in their personal capacity.
  • The assets held in a trust can benefit from generation to generation. There is no limit to the life of a trust in South Africa. Therefore assets can be held indefinitely. In effect, it means that the trust will never pay CGT.
  • With expert planning, beneficiaries receiving income from the trust will pay tax at the individual’s marginal rate, not the higher tax rate for trust. The same will apply to CGT.
  • Not subject to donations tax.
  • There is no limit to the value of assets that can be held in a trust.
  • Trusts generally operate by consensus decision-making. If consensus cannot be reached, disputes go to arbitration, which means that an objective third party is brought in, allowing all trustees and beneficiaries equal protection under the trust.
  • Decision-making can be passed on from generation to generation without tax implications, by bringing new trustees on board when trustees vacate office through retirement, death, incapacity or other reasons.
  • Protect minors from themselves.
  • A trust is often used in estate planning in order to keep the individual’s total asset value low enough so as to minimise estate duty upon the person’s death. There is also no freezing of assets and no executors’ fees.

Property Trust - Disadvantages

  • Subject to higher transfer duty (10%) and high tax rate.
  • Stringent control requirements – board of trustees.
  • High set-up costs.
  • Administration requires the skill of a good accountant.

Individual Capacity - Advantages

  • Lowest transfer duty
  • Total control
  • Minimal administration
  • No set-up costs
  • R50,000 donations per annum free of donations tax

Individual Capacity - Disadvantages

  • No asset protection
  • Estate duty
  • Accumulation of assets and monies in hands of individual
  • CGT on death
  • Freezing of assets on death
  • Costs on death
  • Executors fees on death
  • No protection for minors against themselves

Close Corporations and Companies - Advantages

  • Lower income tax rate
  • Limited liability. In theory an investor who holds a rental-producing property through a company enjoys the benefit of limited liability. If external gearing is used and the property drops in value limited liability could be handy. However, in practice the loan creditor will always require the shareholder's personal guarantee before granting a loan.
  • Where there is gearing, the company still provides a useful deferral mechanism. Where profits are earned it is more useful to pay tax at 29% and use the balance to repay the gearing than if you personally own the asset and your tax rate is 40%.
  • Where rental or other profits are declared as a dividend, the combined effective rate of tax is 35.45%, being 29% normal tax plus STC. Although this is lower than the 40% payable by an individual or a trust, it is not significantly lower.
  • Withdrawing profits - a company funded by a shareholder's loan facilitates withdrawing profits without paying a dividend. However, the CGT rate is 14,5%, as opposed to the individual rate of only 10%. So while STC might be deferred, it is not avoided. When one combines the two taxes (14,5% + 10%), the combined rate exceeds even the 20% rate applicable to a trust.
  • The final benefit is derived from repaying the shareholder’s loan, which enables profits to be extracted while still deferring STC.

Close Corporations and Companies - Disadvantages

  • Little or no asset protection.
  • High administrative costs.
  • Re-finance is taxable.

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