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What are the CGT consequences if a person disposes of a primary residence to a spouse and child?

Tuesday, 17 February 2015   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

Q: What happens if a person dies and leaves half of a primary residence to her husband and the other half to a trust for the child? I know there is no   tax on the transfer to the husband but what about the other half? Do you get a primary residence exclusion, and cut that exclusion in half and apply the apportioned amount to the other half of the gain, or does the division of the exclusion not apply? If it doesn’t apply and the full R2 million is used then the client definitely won’t have to pay any CGT, but if I can only use half in this instance (roll-over + tax part in one transaction) then she will be liable for CGT. It seems simple, but I have never had a disposal exactly like this before and I cannot find a specific example that fits this situation. My gut tells me you must take only have of the exclusion otherwise it would be a skewed calculation. If there was going to be no CGT anyway, I would not even ask but in this case there might be CGT!

A: We have assumed that the husband does own 50% of the house already. On death the assets are deemed to be disposed of to the estate (par 40 Eighth Schedule of the Income Tax Act) or to the surviving spouse (paragraph 67(2)(a) Eighth Sch read with para 40(1)(a)).

As the asset is disposed of to two separate persons we are of the view that the disposal should be treated under paragraph(para) 33 of the Eighth Schedule of the Income Tax Act, as a part disposal to determine the base cost and proceeds applicable to each disposal. 

The disposal to the husband as connected party would be deemed to be equal to proceeds of market value (para 38). However as the disposal is by way of the testament to a spouse it is treated in terms of para 67 whereby the capital gain or loss must be disregarded and the asset is not deemed to be disposed of to the estate. Para 45 (primary residence exclusion) is applied against the aggregate capital gain/loss so there would be nothing to apply the primary residence exclusion against for this disposal. Para 67 would then override the normal base cost rules as to being disposed of at market value by essentially just giving rollover of the base cost to the husband.

The part disposed of to the child’s trust (we assume a special trust for a minor child) will be dealt with under para 40 where the asset is disposed of at market value to the estate which then will dispose of it for this value (i.e. no CGT on disposal in estate) to the trust. The proceeds for the disposal to the estate would be deemed the market value (in terms of para 38 as the child is connected to the mother and the trust connected to the child) and the base cost would be allocated based on para 33 (if the interest is given in equal shares then 50% of the base cost) in calculation of the capital gain. The primary residence exclusion must be apportioned in terms of para 45(2) between the persons who held an interest in the property. If the husband already held 50% the wife would only be entitled to 50% of the R2m capital gain exclusion in para 45(1)(b). In our view the exclusion ties to the structure and a taxpayer is entitled to claim the full exclusion available (See also para 11.3 SARS CGT Guide issue 4) and in our view the law does not compel the R1m available exclusion to be reduced by half due to the part already disposed of to the husband, as long as only R1 is utilised for the wife in respect of this primary residence. Accordingly the full R1m would be available to offset against the aggregate gain for the disposal to the trust as calculated in terms of para 33. To avoid further complications it may be better to treat the disposal to the child as being first in time (i.e. date of death which is before transfer of ownership disposal to husband per para 13) when 50% interest is still held by wife as this would prevent any argument that at later disposal only 25% interest was held and therefore only R500K is available as exclusion.

Please note that if the residence had been used partially for trade (e.g. a home office) or had been leased during the period of ownership, the R1m exclusion would have to be further apportioned (para 49).

Disclaimer: Nothing in this query and answer should be construed as constituting tax advice or a tax opinion. An expert should be consulted for advice based on the facts and circumstances of each transaction/case. Even though great care has been taken to ensure the accuracy of the answer, SAIT do not accept any responsibility for consequences of decisions taken based on this query and answer. It remains your own responsibility to consult the relevant primary resources when taking a decision.



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