By Sanette Viljoen
In what entity’s name should I register my holiday home? This question does not always have the same answer and it will differ according to each person’s circumstances, especially if one’s financial circumstances and also the reasons for buying the house are considered.
What is the position if the house is bought in your personal name?
First, it must be kept in mind that transfer duty at a certain rate is payable from R600 000. This means that you will, for instance, have to pay transfer duty of R37 000, plus 8% on everything over R1,5 million.
Because the beach house was not bought primarily for residential purposes, capital gains tax will be payable when it is sold.
Upon the death of the owner the property will form part of his estate, which means that estate duty is payable. If the value of your property increases to over R3,5 million because of the holiday home, 20% tax will have to be paid on everything over R3,5 million.
Capital gains tax will also become relevant upon the death of the owner regardless of the fact that the beach home was bought at the fair value. Capital gains tax and estate duty are not payable if the surviving spouse inherits everything, but if the surviving spouse later dies or wants to sell the property, capital gains tax will once again come up.
The property will also be subject to attachment by creditors because it is registered in your own name.
What is the position if the holiday home is bought in a family trust?
Before 23 February 2011 the estate duty payable by a family trust was much higher, but since that date the estate duty in the case of a trust is exactly the same as when the property is in your own name.
Capital gains tax can be calculated in two ways. First, the capital gains in the hands of the trust can be taxed, and in such a case two-thirds, i.e. 66,6%, of the gains will be included in the trust’s taxable income and will be taxed at 40%. This means that your rate will effectively be 26,7%, which is extremely high.
Alternatively the capital gains can be paid to the beneficiaries if your children are the beneficiaries of the trust. The capital gains will then be calculated at the tax rate of the respective beneficiaries and will in most cases be considerably lower if the beneficiaries are on a lower rate than 40%.
The income from lease agreements entered into by the trust will be taxed in the hands of the trust, but once more it can be paid to the beneficiaries, who will be taxed at their respective tax rates.
Income tax and capital gains tax can therefore definitely be lowered if the holiday home is bought in a family trust.
No donations tax is payable in the case of a trust. For purposes of estate duty the holiday home is not part of the estate. Neither is capital gains tax payable upon your death because the house belongs to the trust. The trust also remains the owner of the beach house even after the founder of the trust has died. Because the asset does not form part of your estate, it is also protected against creditors.