Various tax and legal implications are applicable when selecting the correct entity to buy property in.
There is no one answer to this question; it depends on your circumstances.
Question to think about
Will the entity allow for easy transfer of ownership in the future?
Natural Person
The owner/owners can sign all documents relating to the sale.
Company / Close Corporation
The shareholders will have to sign a special resolution (75% majority vote) to sell the property if the property comprises the largest part of the company/Close Corporation assets.
FICA requirements: All the directors and shareholders must provide FICA documents
Trust
The trustees must sign a unanimous resolution to sell the property if the trust deed does not explicitly state otherwise.
FICA requirements: All trustees and beneficiaries must provide FICA documents.
What are the compliance requirements for each entity?
Natural Person
No compliance requirements
Company/Close Corporation
FICA compliance requirements.
CIPC annual return requirements.
POPIA compliance requirements.
Financial statements and SARS obligations.
Trust
FICA compliance requirements
POPIA compliance requirements
Financial statements and SARS obligations
How many persons will be involved in the purchase?
Natural Person
Only the owner/owners
Company/Close Corporation
The number of directors and shareholders of the company/the number of members of the Close Corporation.
Trust
The number of trustees and beneficiaries of the trust.
What type of financing options are available for each entity type?
Natural Person
Bond from a financial institution
Company/Close Corporation
Possibly Bond, however, this will depend on the bank’s spesific requirements regarding affordability to grant the bond. The bank may also request that directors sign personal surety in favour of the bank.
Trust
Possibly Bond, however, the bank will check the affordabilty and may have spesific requirements for trusts.
What will the influence be on my estate, should I pass away?
Natural Person
The property’s value will be part of your asset list and considered to calculate Estate Duty (estate tax).
A Capital Gains Tax may apply upon death on the property, which will have to be paid.
Company/Close Corporation
If the deceased was a shareholder in the company, the value of their shareholding will be calculated (the property form part of the total assets of the company).
The value of the shareholding will then be part of the asset list and considered to calculate the Estate Duty (estate tax).
Trust
The property will not form part of the deceased estate, because it is registered in another entity (the trust). However, there may be a loan account that the trust owes the deceased (depending on how the property was transferred into the trust).
This loan account will then form part of the asset list of the deceased estate and be considered to calculate Estate Duty (estate tax). The loan may be repaid to the trust over a period, which will decrease the amount reflected in the asset list. For this reason, there may not necessarily be a tax advantage to this structure, but there may be other reasons to consider a trust.
What is the main advantage of each entity?
Natural Person
The control over the property stays in your hands.
No protection against creditors
Company/Close Corporation
Objectivity.
Limited protection against creditors for the shareholders/directors, depending on sureties etc.
Trust
Objectivity – and assets separate from your personal estate.
Trusts can offer better protection of assets against creditors of beneficiaries.
What is the main disadvantage of each entity?
Natural Person
The property’s value increases the amount to be considered to calculate estate duty (estate tax).
Company/Close Corporation
The property is out of your control – control is effectively given over to the directors and shareholders.
Trust
The property is out of your control – control is effectively given over to the trustees.
Example (Scenario):
Carl is a businessman, and he is contemplating buying a property. However, he worries about the implications of the property’s value in his estate. Also, he has a dilemma because he is in his second marriage, and his children from his first marriage and children from his second marriage do not get along. He wants all his children to benefit equally should he pass away. However, he knows that if he bequeaths this property to his children in equal shares in his Will, it will be catastrophic as they cannot work together to maintain the property or even agree to sell it.
For Carl, a trust may be an option to consider because he does not need a bond/financing. The trust will be managed by trustees, with an independent trustee (objectivity) and the trust will manage and maintain the property and pay in equal shares from the rental proceeds to Carl’s children (who will be the beneficiaries).
The main reason for Carl’s choice is his circumstances; he needs objectivity to manage his family after his death, and not necessarily any tax advantages. However, he is less worried about any Capital Gains on the property because the trust will be ongoing long after his death and thus does not have an end date (and the house will not be sold) – this results in the trustees having some control over Capital Gains Tax (if they do not sell the property). Carl also made provision tax obligations upon death by taking out the right insurance policies.
A Trust is an instrument to manage wealth in the long term, and it is for assets that will not be sold in the near future. If a Trust sell an asset, the Capital Gains Tax at a higher scale.
It is prudent to remember that the South African Revenue Service (SARS) implemented various anti-avoidance measures concerning trusts.
The above are general notes – please consult with us to assess the most appropriate entity for your situation. There are various factors that we have to take into consideration. We also work with your bookkeeper/tax practitioner to ensure that the advice is holistic and correct. We also work with financial planners to ensure that the appropriate policies are in place to cover any taxes upon death.
Lize Vermeulen
19 April 2023
lize@lombardlaw.co.za
elombard@lombardlaw.co.za
