Transferring A Residence From A Trust
23 January 2011
Posted by: Author: Ronel Williams
Transferring A Residence From A Trust
New dispensation extends the relief to holiday homes
Before 2001, many taxpayers made use of a trust to purchase their domestic residence in order to save estate duty, and also as a means of saving transfer duty when "selling” the trust (usually brought about by changing its beneficiaries).
With the introduction of Capital Gains Tax (CGT) in 2001, the benefit of holding a residence intrust was negated: the primary residence abatement 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%. In addition, the Transfer Duty Act 40 of 1949 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 recognised the need to allow taxpayers the opportunity to transfer a residence out of a pre-existing trust. The Taxation Laws Amendment Act 17of 2009 introduced amendments to the Transfer Duty Act and the Eighth Schedule of the Income Tax Act 58 of 1962 to make it possible to transfer a residence from a trust to a natural person without triggering CGT or transfer duty.
These provisions were deemed to have come into operation on 11 February 2009, and were intended to apply to transfers made on or after that date and before 1 January 2012. In order for these exemptions to apply, certain requirements had to be fulfilled:
•The natural person had to acquire the interest from the trust and have the residence registered in their name by not later than 31 December 2011;
•The natural person, alone or together with their spouse, must personally and ordinarily have resided in the property since 11 February 2009 and used it mainly for domestic purposes;and
•The natural person 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.[Please note that these exemptions also applied to the transfer of a residence from a company(including a close corporation), but for purposes of this article the focus is only on trusts].
While this relief was widely welcomed, it soon became apparent that the requirements imposed unnecessary restrictions on taxpayers. The requirement that the taxpayer had to have personally lived in the residence effectively meant that the property had to have been their primary residence. That meant, for example, that a taxpayer’s holiday home could not be transferred to them in terms of this relief. This was seen as being counter-productive to Treasury’s stated aims of simplifying the administration and enforcement of the law.
Treasury reacted promptly and implemented the Taxation Laws Amendment Act 7 of 2010, which effectively provides that the above dispensation would come to an end on 30 September 2010 (as opposed to the initial date of 31 December 2011). It also introduced a new Paragraph 51A, which sets out the requirement s for the new dispensation that applies from 1 October 2010:
•The disposal must take place on or before 31 December 2012;
•The residence must have been used mainly for domestic purposes by one or more persons who ordinarily resided in the residence in the period between1 February 2009 and the date of disposal;
•The natural per sons are connected persons in relation to the trust. A connected person in relation to a trust is a beneficiary of the trust and any relative to the third degree of consanguinity of that beneficiary; and
•The trust is revoked within six months of date of disposal.
These requirements effectively open up the relief so that holiday homes now also qualify to be transferred without triggering CGT or transfer duty. However, the additional requirement that the trust be revoked within six months does have a limiting impact, as it effectively means that the relief will only apply to those trusts that are in a position to be revoked. Where the trust therefore owns assets in addition to the property and the intention is for the trust to continue operating, the relief will not be of any assistance.
The comments above about transferring a property from a trust must 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 to transfer the property to a natural person must therefore be taken within the guidelines of these principles.
Source: By Ronel Williams (Taxbreaks)