With the changes introduced in this year’s budget affecting the wealthy in particular, one might wonder if holding a property in a trust still makes sense. Unfortunately, it is not as simple as transferring the property out, and closing the trust, as there are permutations to consider.
As a quick reminder, the key changes are:
- Higher marginal tax rate on income above R1,5m (45%)
- Effective capital gains tax (CGT) rate for individuals and special trusts increased to 18%
- Effective CGT rate for other trusts increased to 36%
Additionally, Section 7C has been introduced in to the Income Tax Act (effective 1 March this year), affecting interest-free loans within a trust, thus impacting estate planning.
“The practical implication of these changes is that unless there are other compelling reasons to retain the trust, it is probably a better option to transfer immovable property into the name of the individual who made the loan to the trust,” says Willie Fourie, head of Fiduciary Services at PSG Wealth. “Doing so will reduce or extinguish the loan account. However, since Section 7C also provides an exemption if the loan to the trust is made for the purchase of a home for the lender, this should only be considered if a loan has been made to fund a second or an additional home.”
Normally, transferring property from a trust will attract transfer duty, conveyancing fees and CGT. The Transfer Duty Act, however, allows for an exemption from transfer duty if the transfer is made to a beneficiary of the trust within the third degree of consanguinity of the founder of the trust (i.e. to a close relative like a grandchild, child or nephew or niece), and provided that nothing is paid for the property.
You can therefore transfer the property into the name of the relative and deregister the trust. However, the transferee, founder and the transfer itself all need to meet the requirements of the Transfer Duty Act for the exemption to apply.
Another point to consider is the future sale of a property and the related impact of CGT if it is held in a trust.
“Property will attract CGT at an inclusion rate of 80% of the gain, which will be included in the taxable income of the trust,” says Fourie, noting that this is then taxed at 45% and, unlike in the case of a natural person, no annual rebate applies. “Trustees may, however, depending on the provisions of the trust deed, use the conduit principle to award the capital gain to any or all of the beneficiaries of the trust. This will help to ensure that the inclusion rate is reduced to 40% and the annual rebate of R40,000 is applied.
Because this is a complex matter, it is best to consult a fiduciary adviser for assistance, particularly as each trust will have different circumstances, and one should consider the impact of transferring assets from a trust, or deregistering a trust, holistically.