The tax benefits of transferring a primary residence from a CC, Company or trust to a natural person
Individuals who own their primary residence in a trust, company or close corporation have until 31 December 2012 to take advantage of the tax exemption afforded by a SARS directive in terms of Section 9(20) of the Transfer Duty Act.
The Income Tax Act provides that only natural persons are entitled to exclude R1.5m from their taxable capital gains on disposal of their primary residence. The exclusion does not apply where a natural person owns their primary residence in the name of a company, trust or close corporation.
The tax directive allows natural persons to transfer their primary residence into their names without incurring any adverse tax consequences.
The following conditions must be met in order to qualify for the relief:
- The residence must be transferred into the name of a natural person or persons;
- The acquisition must take place before 31 December 2012;
- The residence must have been used mainly for domestic purposes and must constitute the acquirer’s primary residence;
- Within 6 months of the date of the acquisition certain steps must be taken to terminate the entity from which the property was transferred;
- The natural person who is to acquire the property must be a connected person in relation to that company, trust or close corporation. Thus the person must be a beneficiary of the trust, a shareholder of the company of a member of the close corporation;
Benefits derived from the transfer to a natural person:
- No transfer duty is payable on the acquisition of the residence which constitutes the acquirers residence;
- No secondary Tax is payable on companies in respect of any dividend arising in consequence of the transfer;
- There is no capital gains tax payable on any gain realized by the company or trust as a result of the disposal.
When taking advantage of this exemption, one will be abandoning the benefits of holding the property in a separate legal entity. These benefits include the protection against creditors as a result of the limited liability of a trust; company or close corporation and certain tax relief.
Therefore, the tax exemption afforded by Section 9(20) of the Transfer Duty Act must be weighed up against the benefits of holding the property in a separate legal entity.