Transfer of primary residence from trust. Ronel Williams examines the complications and what is needed for you to qualify.
Before 2001 many taxpayers used a trust to buy their primary residence in order to save estate duty and also as a means of saving transfer duty when “selling” the trust or changing its beneficiaries.
When CGT was introduced in 2001, the benefit of holding a residence in trust was negated. This is because the primary residence CGT abatement of R1.5m applies only to natural persons and not trusts, the inclusion rate on the capital gain is higher for a trust and a trust’s income is taxed at a flat rate of 40%. Added to this, the Transfer Duty Act was amended to include anti-avoidance rules, which effectively meant that transfer duty would be payable where the trust was “sold” or the beneficiaries changed.
National Treasury has recognised the need to allow taxpayers the opportunity to transfer a residence out of a pre-existing trust and so various amendments have been introduced (Trusts to get huge tax break on properties) to make it possible for someone to transfer a residence from a trust to him or herself without paying CGT or transfer duty. There is a window period for such transfers which dates from 11 February 2009 until 1 January 2012.
But it is not that simple as the following important requirements need to have been met for you to qualify for an exemption:
- You need to have acquired the interest from the trust and have the residence registered in your name by not later than 31 December 2011;
- You alone or you and your spouse must “personally and ordinarily” have lived in the property since 11 February 2009 and used it mainly for domestic purposes;
- You must have transferred the property to the trust by donation, settlement or other disposition or funded all the expenses incurred by the trust to acquire and improve the residence.
- The land attached to the residence must not exceed two hectares and must be used mainly for domestic or private purposes together with the residence.
How the tax break works
Let’s consider the CGT impact by using a fictitious property valued at R4m, with a base cost of R2m.
- Property remains in trust
| Proceeds | 4 000 000 |
| Less: base cost | 2 000 000 |
| Net gain | 2 000 000 |
The trust is not entitled to the primary residence abatement or annual exclusion, therefore the entire amount is taxable. 50% of the gain will be included in the trust’s income and taxed at 40%, resulting in CGT of R400 000. (Note that is is possible to vest the proceeds or the gain in the hands of the beneficiaries, in which event it will be taxed in their hands at their marginal tax rates).
2. Property is transferred to natural person
The person obtains the property at the base cost it had in the trust, i.e. R2 million. He therefore makes R2m gain when he disposes of the property, but he will be entitled to the primary residence abatement and annual exclusion:
| Gain | 2 000 000 |
| Less: primary residence abatement | 1 500 000 |
| annual exclusion (2010 tax year) | 17 500 |
| Net gain | 482 500 |
25% of the gain will be included in his income and taxed at his marginal rate. Assuming a rate of 40% (the maximum), the CGT payable will be R48 250.
So the tax break is clearly hugely significant. However, despite the CGT benefits involved in transferring the property to your own name, remember that each individual case must be considered on its own merits as there may be factors that make such a transfer unfavourable, for example:
- Your estate will be increased, which will expose it to fees and estate duty.
- Your property will not be protected against your creditors.
- The costs of conveyancing.
As the property is owned in a trust bear in mind that these comments should be seen in the context of the general principles relating to trust law, namely that the trustees must at all times in the performance of their duties and exercise of their powers act with the care, diligence and skill which can reasonably be expected of a person who manages the affairs of another. Any decision by the trustees to transfer the property to your name must be taken within the guidelines of these principles.
*Ronel Williams is a fiduciary specialist with BoE Trust and a member of the Fiduciary Institute of SA (FISA).