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In our January Newsletter we dealt with relaxation of tax and duties when a primary residence is transferred from a Trust or Company to a natural person. We touched on the circumstances where, in a transfer by distribution of a house having a base cost value of R1 million but a market value of R10 million, the party best entitled to whoop for joy was a third party, namely SARS, which upon the death of the recipient would gain an additional 20% of R10 million. We suggested that this oddity, and its effects, might be allayed if the property were sold at market value by way of a loan account.
Clarity, of sorts, has now been furnished, by Appendix “B” to the Taxation Laws Amendment Bill. SARS concedes that a Company may dispose of the residence “by distribution in specie, or by a sale.” But while this qualifies for CGT and Transfer Duty exemption, it would not be exempt from STC! For accounting purposes, the Company has made a capital profit that has to be distributed, and STC is payable. Anyway, it unnecessary to use the sale procedure for companies, because the natural person gains an asset the value of which is identical to the decrease in the share’s value...
Insofar as Trusts are concerned, however, a sale is still in my view appropriate and without fiscal disadvantage. A Loan Account is created, reflecting the value of the residence in the Trust against the value of the property in the natural person’s estate. However, where spouses are married out of community of property. transfer can only take place in favour that spouse who has wholly funded the acquisition of the residence by the Trust. Otherwise the exemption doesn’t apply; i.e. if both spouses have funded the Trust or a third party in a miniscule proportion, then neither can take transfer in terms of this exemption, which again seems short sighted.
I am often queried on this exemption where the house is owned by a Company, the shares of which are in turn held by a Trust. To qualify, the shares have to be held by a natural person! I urged SARS to extend the exemption to similar structures, on the basis that now was the time to clean up on all aspects of the situation but unfortunately to no avail. |
