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Is Fixed Property In A Trust Still Viable?

31 July 2012   (0 Comments)
Posted by: Author: Gerrie Vosser
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Is Fixed Property In A Trust Still Viable?

There’s the costs—and, of course, there’s the tax issues…

For many years, the high transfer duty rate applying to trusts made it less attractive to purchase fixed properties in trust, a situation that changed (quite unexpectedly) for the better when on 23 February 2011 the transfer duty rate for trusts was adjusted downwards to the same more favourable rate as those for natural persons.

However, just as unexpectedly,in the 2012 Budget, Capital Gains Tax (CGT) inclusion rates were increased, resulting in trusts now being exposed to a maximum effective CGT rate of 26.7% compared to those of 18.6% and 13.3% for private companies and private individuals respectively.Concerns have subsequently been raised that ownership of fixed property in trust as a way to create,protect, utilise, and transfer wealth may have been dealt a crippling blow. However, these concerns turn out to be unjustified when various fixed property ownership options are analysed from an integrated, multi disciplinary point of view.

Optimal ownership of investment property

Consider the example of an investment property, fully paid,currently worth R 1 000 000 (use this as base cost for CGT) with a projected annual capital growth rate of 10% and a current annual rental income of R 72 000 (net of cost).The following comparative tax and cost analysis of various ownership options shows a trust to be the optimal ownership choice:

Personal ownership: Property owned by Joe Bloggs, successful business person and subject to an income tax rate of 40%, married out of community of property to Jill, an unemployed housewife, with two children approaching their teens and Jill's mother financially dependent on the Bloggs’. (Even without this investment property,the net value of Joe and Jill's combined estate and life assurance already exceeds R7 000 000.)

Private company: Property owned by a private company, the shares of which are held by Joe.

Family trust: Property owned by a fully-discretionary family trust with a personalised beneficiary base.

Analysis of the three options In suitable circumstances and from a tax and cost point of view (see table below), a properly structured and professionally-used discretionary trust without doubt still provides the optimal ownership solution for an investment property.

Remember, however, that benefits should never be the primary reason for establishing and using a trust. Tax legislation may change for the worse; and personal circumstances may change and neutralise potential tax benefits.

Remember too that the planning,drafting and upgrading of trust deeds, as well as the management and administration of trusts,all require multi-disciplinary professional skills. Members of the public are advised to seek out a practitioner who is a member of the Fiduciary Institute of South Africa (FISA), who are bound by a code of ethics to adhere to a high professional standard.

 

Source: By Gerrie Vosser (Tax breaks)


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