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Tax relief for transfer of a residential property if you act by end of next year

29 Nov 2011

•First, companies, trusts and CCS pay a higher effective rate of capital gains tax (CGT) than individuals.

•Second, individuals who sell their primary residences pay no CGT on the first R1.5 million profit. Legal entities don’t qualify for this break.

•Third, people who buy interests in legal entities that own residential property pay transfer duty when they buy those interests - and not only when they buy the property from the entity concerned.

So, holding residential property in a legal entity may be a bad thing from a tax perspective. But what if your property is a company, CC or trust already? How do you unscramble the egg?

Fortunately, the South African Revenue Service (Sars) has offered relief. Until December 31 next year, people who hold residential property in companies, CCS and trusts may transfer it into their own names free of taxes, if they meet certain requirements.

This is not a do-it-yourself exercise. You need to get advice from an attorney or other professional adviser to understand whether you meet the requirements for the relief, what the tax implications are, how to practically implement the relief, and to register the transfer in the Deeds Office.

Simply put, to qualify for the relief you must meet the following requirements:

•The property must be a residence.

The residence must have been used mainly for domestic purposes from February 11 2009 by persons who are (1) natural persons and (2) connected persons in relation to the company, CC or trust. Simply put, a shareholder holding 20 percent or more of the shares in a company is a connected person in relation to the company; any member of a CC is a connected person in relation to a CC; and any beneficiary of a trust is a connected person in relation to the trust. Practically, this means that the connected person had to live in the house himself; if he rented the whole house, or the larger part of it, to tenants, he will not qualify for relief. It also means that a second or third home used mainly for domestic purposes (for instance a holiday home) may also qualify for the relief.

•The company, CC or trust must dispose of the property to the natural person by December 31, 2012. This does not mean the property must be registered in the name of the natural person in the Deeds Office by that date; but the parties must have signed some written agreement to transfer it.

•The company or CC must be deregistered or wound up - or in the case of a trust be terminated - within six months of the disposal of the property. To do this, the entity must have disposed of all its assets and liabilities.

If the transaction is implemented properly, the parties should suffer no transfer duty, CGT or secondary tax on companies. For CGT purposes, the person taking over the property effectively "takes over" the CGT base cost of the residence.

However, bear in mind the following practical aspects:

•The law does not provide for relief from donations tax. So, be careful to make sure donations tax does not arise.

•The transfer of the property to the natural person may have estate duty implications for the natural person as the value of her estate may be increased.

•If the company, CC or trust has registered a bond over the property, it will need to be cancelled and possibly refinanced in the name of the natural person.

•If there are loans owing by or to the company, CC or trust these will need to be settled, otherwise the relevant creditor may suffer CGT or income tax if the loans are simply written off.

•The relief does not apply to assets other than residential immovable property, such as commercial immovable property, golf memberships and motor vehicles.

•You need to think carefully about what the underlying cause for the disposal will be - for instance, will it be a sale or a distribution?

•You will need to pay conveyancing fees and charges to transfer the property.

If you think you are a contender for relief then get professional advice, and remember the December 31, 2012 deadline.

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