Investing in residential property is typically long-term in nature, and therefore the choice of which entity is used to purchase such an investment is of paramount importance. Once the choice is made and the transfer takes place it is no easy task to make changes or have the flexibility to move those investments to another entity or structure.
South African Tax Law imposes difficulties when considering restructuring, mostly due to the fact that the transfer of an investment property from your personal capacity to a Trust or Company under your control, is treated as being transferred at current market value, and therefore has tax implications. In summary, the expenses and diffficulties endured in moving an investment property (to another entitiy) include:
- Transfer Duty calculated on a marginal basis, up to a maximum of 8%.
- Capital Gains Tax calculated on the growth of the property since initial acquisition.
- Legal Fees (Transfer Attorney).
- Legal Fees (Bond Attorney).
- Security on a new bond (as we all know- not an easy or efficient task).
- Rates Clearance procedures with the local municipality.
To avoid incurring the above, it is 100% necessary to acquire/purchase the investment property directly into the current entity by seeking professional advice before acting.
Purchasing into a Trust has many advantages, many of which hinge on the transaction being long-term in nature. Unlike a company, wealth held in a properly structured/administered Trust does not form part of the investor’s personal wealth. Typically, where a company is used, the shareholding is held in the investor’s personal capacity and therefore a property purchased into the particular company indirectly forms part of the investor’s personal wealth. Removing this connection in an integral factor required to reduce the property’s exposure to:
- Personal creditors
- Business creditors
- Death and the related taxes and fees.
Whether you choose to invest in your personal capacity, company or a Trust, ensure that maximum tax efficiency is maintained by considering the following:
- Tax efficiency due to pooling- a tax positive investment property can be offset against a tax negative property in the same entity (the use of Trusts, however, extends this application).
- Leveraging and tax relief- utilising mortgage bonds (‘other people’s money’) to acquire investment property results in a more desirable tax position due to the tax deductibility of the interest on the bond.
- Trust and the conduit principle- with the assistance of specialist Trust advice, the use of the ‘conduit-principle’ can result in enormous tax savings. Comprehensive anti-avoidance exists in the Income Tax Act, though, therefore expert Trust advice is recommended.
- Home office expenses- better suited to full-time property investors, certain expenditure related to your home is tax deductible.
Whenever we consider making any investment, we always demand the very best and most efficient mechanism to maximise our returns. Yet, often we don’t structure our investments correctly, resulting in severe losses due to all the structural inefficiencies. These are unnecessary losses that place all our personal wealth under unnecessary risk.
Does it make sense not to get the basics right? Not to structure our investments in the most efficient and effective ways so that we get the maximum return from our hard-earned incomes?
These are the very basic fundamentals that we need to start living the life that we want to live, and not the life that we are forced into.