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Putting a primary residence in a trust

Jan 08 2014 18:29
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A Fin24 user wants to know if it is a good idea to put his home in a trust. He writes:

We are a professional couple in our early fifties. We have three teenage children.

We have a bond-free personal residence worth about R4m. We also have a trust, which has purchased properties for rental income. These properties are worth about R3m with bonds of about R2m.

We would like to know which is the better of these two options:

Option 1:

Leave the personal residence out of a trust, and use our donations allowance to reduce the value of the properties in the rental trust.

Option 2:

Transfer our personal residence into a new trust (with the associated transfer duty costs) and use our donations allowance to reduce the value of our personal residence in the trust.

Elzahne Henn, associate director at Mazars, responds:

For the purposes of the response, we have assumed that the property in question qualifies as a “primary residence” as defined in the Income Tax Act.

From a capital gains tax point of view, we would not suggest that you transfer your primary residence to the existing or a new trust.

Where a natural person disposes of a primary residence, up to R2m of the capital gain determined on disposal must be disregarded and is therefore not subject to capital gains tax.

This exclusion is not available to a trust, unless it qualifies as a “special trust”.

Moreover, the remaining portion of the capital gain (after applying the exclusion) would be subject to a maximum effective tax rate of 13.32% in your own hands, compared to an effective rate of 26.64% payable by the trust if the gain is not distributed.

Please note that we have based this response on the information received from you and the assumptions made, so Mazars cannot take responsibility for its accuracy.

It should be emphasised that the above is only a general outline of very complex provisions, to help you decide whether you need further detailed advice. The best option is always to consult a qualified impartial adviser.

 - Fin24

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