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Monday Dec 03, 2012

End of moratorium on tax looms for residential properties held in trust

If you hold residential property in a trust, a company or a close corporation, you have until December 31 to transfer it into your own name and avoid paying transfer duty, capital gains and other related taxes.

Pointing this out recently Ulrik Strandvik, a director of Gunstons Attorneys, says that paragraph 51A of the eighth schedule of the Income Tax Act stipulates that the transfer of properties held in close corporations, trusts and companies must be concluded no later than December 31 if they are to qualify for the tax exemptions.

The property only needs to be disposed of by that date - that is, the sale, or distribution of dividend in specie, or distribution to the beneficiary must take place before December 31 - but the transfer registration can take place later, Strandvik says.

"Attorneys and accountants have been urging clients to use the tax moratorium and have pointed out that in most cases home owners will benefit from transferring their primary residences into their own names. This is because the owners will qualify for primary residence exclusion when such properties are eventually sold. This is not applicable to standard trusts, companies and close corporations, but only to natural persons.

"The exemption will in most cases eliminate capital gains tax or greatly reduce the seller's liability for this tax, depending on the gain that is made.

"The conditions for qualifying for such a transfer are that the property must have been used mainly for domestic purposes by the person to whom the property will be transferred. This would certainly cover primary residences and/or holiday homes owned in a trust, company or close corporation.

"Furthermore, the owner must be 'connected' to the trust, company or close corporation. The definition of 'connected person' is quite broad and would include beneficiaries and trustees of the trust, shareholders and directors of a company, members of close corporations and in certain circumstances would also include relatives of such people.

"The trust, company or close corporation must also be wound up within six months of the transaction.

"If the owner of the property complies with these rulings, the tax advantages are great. For example, if you sell your primary residence, which is held in a company without taking advantage of the moratorium, and make a gain of R2 million, then your capital gains tax would be 18.65 percent (the effective rate) of the gain of R2m, which amounts to R373 000.

"If you take advantage of the moratorium and transfer the property into your personal name and then sell it, there will be no capital gains tax payable as the first R2m of the gain made on the sale of your primary residence is excluded."

Weekend Argus (Sunday Edition)


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