If you think the best choice for your situation is buying property in a trust in South Africa, start the process long before you start searching for land. When you are the Sole Trustee, you run the risk that SARS will conclude that the properties of the Trust are your own and tax you or your estate accordingly.
There are four main types of property ownership in South Africa: natural person, close corporation, through a trust or, (Pty) Ltd.
What is a trust in South Africa?
You’ll have to pick and nominate trustees first too. The Trust deed and all relevant documents must then be deposited with the Court’s Master, Trustees must be duly named by the Master and a resolution must be signed by all trustees allowing one trustee to be the signatory. To buy immovable property, the signatory must be in possession of a letter of authority from the Owner.
The seller’s agent would need to see a copy of the Trust deed, Letter of Authority, copies of the trustee’s Identification cards, the signatory’s permission paper, and a utility bill for each trustee. An experienced agent would be able to advise you, but it is strongly recommended to appoint an attorney or accountant to help you shape and register a Trust.
- An ownership trust: the trust founder passes to a trustee control of the assets or property to be held for the benefit of established trust beneficiaries.
- A bewind trust: the creator passes ownership of the assets or assets to the trust beneficiaries, but power over the assets is granted to the trustee(s);
- Curatorial trust: According to this arrangement, the trustee administers the trust assets for the benefit of a recipient who has no capacity to do so (a disabled person).
Trusts are usually created in South Africa in two ways: Inter-vivo’ (while the creator is alive) and ‘mortis causa’ or testamentary, which is founded in terms of a person’s will and comes into effect after their death
Why buy property in a trust?
Buying property in a trust relies on one’s investment strategy and long-term plans. One other cool reason you’d like to purchase a property in a trust is that it’s going to be safe for future generations. If the home in which you live is owned by a trust then it does not be part of your assets when you die, so no taxes will be involved. The money stays in your pocket, and you save hundreds of thousands theoretically. When a property that is leased out is held by the trust then that asset and income is covered for future generations.
Trust Deed is the trust’s most critical feature because it determines what the trust may and may not do and all the terms and conditions. Paying a professional for drawing up this is worth your time! A trust is a legal body formed by a founding trust that can be used to buy and own land. If a trust is established, either the trust creator donating the assets to the trust, or the trust buying the assets, puts all assets into the trust.
When the assets are donated to the foundation, they will have to pay a donation tax depending on the value of the assets. When the trust buys the properties, otherwise there will be a transfer obligation.
Why do some people still use this agency to purchase land, with the costs involved in setting up a trust?
A trust is also used to safeguard the assets and guarantee that if anything happens to the trust creator, the designated beneficiaries, who are the children of the trust creator more often than not, get the advantage of using the assets.
When the trust is created and the assets are moved out of the hands of the trust creator, the trust creator will no longer be the owner of those assets. All this means is that if the trust holder passes away, the properties in the trust will not form part of the deceased property, and hence will not be included in the measurement of the obligation on the land.
It is difficult to add the properties within the trust if the trust creator is insolvent, as long as the stipulated time has elapsed. A duration of six months would elapse if the trust manager was solvent at the time of asset transfer, or in the case of insolvency for up to two years.
Therefore, buying a property in trust is an ideal way to protect the assets by ensuring that the beneficiaries take advantage of them in the future while avoiding paying property tax on the value of the assets.
Unless the trustees want to buy additional land, then the land must be listed under the trust’s name and not the trustees. If a bank needs to fund the purchase of the land, the trustees must have the authority to buy property in the trust’s name, borrow money for the purchase of property, thus, the powers to charge trust assets as protection for the trust’s obligation.
You have the option of purchasing the home in a trust when you purchase a house. The trust allows you to keep the property for your benefit and the benefit of someone you agree after you to own it. Buying a home in a real estate trust will offer benefits for you and your beneficiaries that would otherwise not be available. Preparing an estate trust in anticipation of future economic difficulties or preventing a family court battle for an estate will easily ease the transfer of assets and help set up the family for the future.
You will become the real estate trustee and your successor is the trustee when you die. The trustee is essentially the real estate agent in a trust. When you are the founder of the faith, you will have other powers over where your home will go after you move. Some of the advantages of a trust are that it legally safeguards your assets or your property, which can help you hide your assets estate from the economic issues of the future.
The first step in buying a trustworthy home is to create a relationship that lives on. A living trust is created during the lifetime of an individual, by having an appointed trustee to administer the assets or the home for the benefit of the beneficiary. The homeowner will have to determine what kind of living trust to set up and that decision will depend primarily on who will have the legal right to inherit and sell the property.
A trust can be used to cap or lock the value of the property purchased in the trust. Within a trust a house is no longer part of a personal estate, allowing substantial savings on land duties and other fees and death taxes. In case a person is declared insolvent, a property which is in a trust provides protection against creditors. A trust also provides the continuity in case of death of one of the trustees.
A trust provides a way, like a land, to protect an asset from maladministration, careless management and other taxes.
Buying a house can seem like a complicated procedure for your kids. Nevertheless, a financial planner or solicitor will help you set up this kind of trust. Imagine the rewards of buying a home for your children. They will have a place to live rent-free when they are studying or starting their first job. They will never have to count on small loans on the same day. This would drastically minimize the sometimes daunting amount of costs that young adults face when getting out into the real world. It can also improve their chances of making sound financial choices and not getting stuck in the pit of short-term loans to stretch their profits.
This system can be used for a short or longer period of time, and as an investment in the future of your child. It is highly recommended! Not only can you help your child save a deposit for their own first home, but if you sell the house you will still be able to enjoy the rewards of a long-term investment. You can bring the proceeds to your child buying a house or you can use them on your own.
Things to know about Trusts in South Africa
If it comes to capital gains tax and transfer duties, trusts are taxed at the highest rate, and selling a property from a trust would actually cost more than if it were in your personal power. However, if you’re not trying to sell the property then that won’t be a problem. Rental income (or other income), if derived from a trust, would be taxed at the highest rate. Trusts introduce a degree of complexity in relation to management and general finances. There are ways to organize your taxes as effectively as possible but you do need the support of an accountant who understands your trust. Trusts cost money to manage because you need Annual Financial Statements and paying for a professional independent trustee is strongly recommended.
It’s also the case that many young people don’t get to purchase a first home. The solution can be to employ a trust. The way to approach this type of investment is to create a simple-to-establish trust. If you already own a second house, then this clever device can still be used.
In buying a home for your child you will stop paying the capital gains tax and inheritance tax. This is a legal way of paying taxes. The reforms in the capital gains tax laws now imply that there is an incentive for those parents who want to invest in the future of their child.
Ideally, you can set up a trust before you agree to buy a home. As trustees, you must appoint either one or both parents. The costs for this part of the package are low and only a few hundred pounds would set you back. You then lend the deposit money to the trust fund, instead of buying the house yourself. The trust then uses a mortgage to make the purchase. The trust then uses a mortgage to make the purchase. Banks will usually recommend that you be a guarantor of the funds.
With that investment opportunity, there are two forms of trust available. A life interest trust can be created with a child identified as the beneficiary. It ensures that the designated person would get little income from renting out the property. Additionally, you may use a discretionary trust to appoint two or more babies. It ensures that the trust will not send the beneficiaries revenue automatically. Although, this kind of trust document has more versatility. So the beneficiaries of a discretionary trust will shift as life tenants, who are able to live rent-free. Thus, for a number of years, one child may occupy the house and then another may take over the tenancy.
Whatever kind of trust you create, the beneficiaries are entitled to live in the property without paying rent. They’re called tenants of life. Since the children are trust beneficiaries, they are regarded as having their own house. This means they don’t pay any tax on capital gains on a private estate.
What happens if you already have a property and want to move it to a trust?
In reality, transferring a personal property to a trust would be a regular selling of a property with you as the seller, and the new buyer as the trust that will incur tax on capital gains, duties transition and attorney fees immediately. Thus, it could be an expensive workout.
Also, if the trust doesn’t have the cash on hand to buy the house, you’ll need a loan account and the trust will own your money. This loan account is subject to interest of at least 7.75 per cent (as of Feb 28, 2018). Unless the trust is unable to pay the sum due with interest, the money will be considered as a gift under the section 7C of the Income Tax Act.
What happens if I want to move a property out of a trust?
The selling of a property from a trust function like the sale of land. The main distinction is that trusts are taxed well in excess of individuals. However, the mechanism is the same as a regular sale. You will need a signed agreement from the trustees and then follow the procedure as the transfer lawyers decide. Trusts can be perfect investment vehicles to build your family wealth and secure future generations of wealth. The trustees must mutually decide that the property should be sold, and it has to be in the beneficiaries’ best interests.
Buying a Home with a Revocable Trust
A revocable trust is usually represented in the “Trust Agreement” to the “Trust Declaration.” Think of it as the document you sign that determines the rights and heirs of the estate you make. Every form of trust owner or grantor has complete power of the trust at all times and can change it whenever they want. The grantor may appoint beneficiaries or, in some cases, be the trust’s beneficiary and can alter them at any time. Revocable means “capable of being cancelled” and follows as such for this type of “contract”.
If you purchase a home with a revocable trust, the trust legally owns the home. If you’re the grantor or writer of the trust, you own the home through the trust. You can assign beneficiaries for the trust so that in the event of your death, they will inherit the home. A trustee could also be assigned to help you manage the legal documents, or you can assign yourself as the trustee. When you purchase a house with a revocable trust, it is the trust that legally owns the home.
Whether you are the trust’s grantor or editor, you own the house through the trust. You should appoint heirs to the trust and they can inherit the home in the event of your death. You can either appoint a trustee to help you handle the legal papers or you can nominate yourself as the trustee.
However, the main tenet of a revocable confidence is that if you want to do so, you are in charge and may revoke it.
Buying a Home with an Irrevocable Trust
Conversely, an irrevocable trust does not allow any alteration or termination of the trust without the beneficiary’s permission. The Trustee serves as a trustee responsible for handling the beneficiary’s estate. A fiduciary is someone who works on behalf of someone else or manages money.
Also, it uses an irrevocable trust to escape taxation on gifts above the taxable limit — in this case, real estate. In cases where you want to shield the estate from any potential financial difficulties, irrevocable trusts may also be of benefit.
If you’ve developed a considerable estate, but later in life, your kids fall on tough financial times. Irrevocable trusts would shield assets from investors because assets were placed into them before credit issues occurred. Nonetheless, it is extremely important that you have faith in the selection of your beneficiaries, with an irrevocable trust.
Consider Estate Planning
Both revocable and irrevocable trusts are instruments of estate planning. When doing this form of estate planning, there are several important steps to take:
The Level of Control
The first step is to assess how much you want control over the properties, including your house. Consider the control rates that each form of trust provides to you as the writer but also the beneficiaries. It’s also important to think about how you want to handle your house or properties, including ownership of your house, how it can be sold or what happens if you become sick or disabled.
Call in the professionals
Find a Financial Adviser and an Attorney for Estate Planning. For any of these professionals present, no proper trust, trust document, or meeting can ever be carried out. Everything has its own expertise, and you’ll need both of them to properly guide the dispersal of your money. The greatest mistake customers make is consulting their lawyer and solicitor separately, only to find out that there are problems after the legal document is written.
Every specialist has their own strengths. Financial experts are helpful in allocating money to the estate’s potential costs while an attorney is versed in what will hold an estate out of probate court. Trusts are serious legal documents and should be treated as such, especially as regards your home. Effective tax advice should be sought from a tax expert prior to forming and maintaining a Trust.
If you are planning to put your property in a trust, it is useful to know that your trust benefits from your tax law to decide if this is a viable route to secure your asset and leverage your assets.
A trust is essentially a legal individual appointed to protect and support the assets that have been invested in that entity, both legally and financially; there is no solution that will work for everyone when it comes to placing a property into a trust, as it is entirely dependent on individual needs and circumstances.
Reasons for buying property in a trust
For several purposes, trusts are created most frequently to protect the beneficiaries’ properties. Another factor why many buyers are looking into buying property under a trust is the perceived tax benefits of doing so. At the time of death the value of immovable property kept in trust does not change the actual net worth of the owner for tax purposes. This decreases the burden on the estate that is due. Thus, as long as the property stays within the trust, the executors’ fees for that property will be reduced, as will the capital gains tax and the fees for converting the property into the name of an heir. The primary justification for establishing a trust would always be to protect the asset, in particular against beneficiaries who do not have the know-how or capacity to handle their finances effectively.
Buying a second house is one of the easiest ways of making an investment for your child’s future. That is a legal way to stop paying tax on capital gains. It will help your children save on rent money without having to rely on wage day advance loans every month! However, it also ensures your own exemption from tax on capital gains is not affected.
However, as soon as property purchased is sold under trust, the automatic consequences will be felt. No exception is available for a legal entity such as a Trust selling an immovable property, even though the Trustee lives in the property directly and considers it their primary residence. Capital Gains Tax will still apply and, in the case of an individual person, 80% of any income will be included in the definition of trusts, as opposed to 40%. Annual operating disbursements are also available to ensure that the legal entity’s tax relations are kept up- to date.
Another potential negative is that a trust that has no other assets than a property would struggle to obtain a loan, and may need some form of protection. The bank may bring a claim against the estate, or even compel the selling of the property to settle the loan, if the security signatory dies. Note also that all profits a trust earns is taxed at 45%. Note, actions committed before the Trust was established or registered cannot be accepted by a trust.
Despite that, since the trust manager is no longer the asset owner, he or she has no absolute power over them. The trust-founder appoints trustees in a trust deed or contract to administer the trust and its properties. The trustees are also the solicitor or accountant of the trust funder.
Nevertheless, there are times where the trust manager, along with their partner as the trustees, also nominates themselves. The trustees’ responsibility is to administer the properties according to the terms and conditions of the deed of trust.
It is important to consider the fiscal consequences of establishing a trust, and how it varies from an individual’s. A trust will most likely pay a higher tax rate than an actual taxpayer.
Any income earned by the trust will be taxed at 41% per annum, and trusts will not offer any rebates. A trust will also pay Capital Gains Tax (CGT) on any capital gain it makes and will be paid at a rate higher than an individual’s. On the plus side, the rate owed to CGT by a trust is lower than the rate of duty on the estate.
Advantages and Disadvantages for buying property in a trust
8 pros of holding property in a trust
- A trust does not expire (called “perpetual succession”), so it is not liable for property duty, transfer duty, executor’s or transporter ‘s fees, or capital gains tax (CGT) that may otherwise arise upon the death of an owner.
- Land held in a trust is covered from creditors because it is not part of your personal assets.
- Your death does not impact your trust and the properties registered therein. Unless the heirs are trust beneficiaries, the property does not have to be moved into the heirs’ hands. When a Trust has been established, and the assets moved from the name of the creator, the Trust owns the assets. By fact, this ensures that if the founder passes away, the Trust’s properties do not form part of the estate of the deceased, and will not be responsible for property duties.
- Profit from the property of the trust is for the trust, and expenditures including bills of repairs, cleaning, heating, and rates are also for the account of the trust.
- Keeping a property held in a trust rather than your own name means a decrease in the value of your personal assets, which reduces your liability to property duties.
- While a trust is taxed at the highest marginal rate (45% as per the 2019 budget), trustees have the power to allocate rental income to beneficiaries to reduce the tax position rate.
- The executor’s fees on these properties will be excluded and there will be no need to transfer the property to any of the heirs of the deceased, which in effect saves needless transfer obligation and future capital gains tax.
- In fact, assets are secured from creditors because the Trust is not created to harm creditors. The assets in the Trust cannot be added if the creator is insolvent after a certain amount of time has passed. As at the time the assets were transferred the creator was solvent a period of six months would have elapsed. Where the creator was insolvent at the time of sale, for the assets to be covered a period of two years must have elapsed.
6 cons of holding property in a trust
- Setup and administrative expenses are involved.
- Problems that arise when the property trust is not properly formed or administered. The trust is going to be a different taxpayer, this is the expense of another tax return.
- If you lend the trust money, you will be charged interest at the SARS rate.
- The banks are unlikely to offer a 100 per cent bond to a trust when home loan financing is necessary.
- If a bank loans to a trust, they are likely to request signed surety or cash security of some kind. If the person who signed surety dies, the banks may make a claim and then sell the house to settle the outstanding bond if the estate does not have ample equity. The balance should have been payable to the family. If you owned the house directly, you could experience a similar circumstance when you die. You can take out insurance for mortgage protection. The balance should have been payable to the family. If you owned the house directly, you could experience a similar circumstance when you die. You can take out insurance for mortgage protection.
- Technically a founder is no longer in charge of the Trust assets because he is not the beneficiary. Trustees are named for the management of the company and its properties. Thus, these assets are managed by the Trustees whose powers are restricted and specified in the deed of trust. Depending on whether or not it is a vesting or discretionary trust, their controls can also be restricted – a separate matter to be addressed at another time. It should also be remembered that the founder is also generally a Trustee, and will typically select the Trust’s first Trustees.
Who does the trust vehicle make the most sense for?
Company owners also want to protect their liabilities from creditors. This implies that in the case of debt and/or insolvency, creditors cannot go after the land.
Wealthy people who want to save on expenses and taxes like estate duty and executor’s death fees. They claim ‘wealthy’ citizens as the tax incentive comes into play only when one owns more than one residential property.
Ultimately, but perhaps most critically for ‘ordinary’ property owners, families with a proven history of serious disease or people with mental disorders may consider buying property in a trust to ensure the property is handled appropriately.
The person who created the trust must be is safe, have no criminal record and must never have been blacklisted.
Who should rather avoid going this route?
Individuals with only one property. Unless the property is sold at a profit, you must lose the R2 m capital gains refund into the trust. It will cost between R4000 and R7000 to set up a trust and this is a cost factor that needs to be taken into account. Please bear in mind that the trust must also be managed regularly and annually, ideally by a competent person with expertise in trust management. At least one of the trustees must be separate or in some other way unrelated or a family member or a linked individual. The trust manager often relinquishes ownership of the estate, and the intended beneficiaries cannot receive income for a prolonged time, which may have implications.
What are the important legalities around trusts that are worth noting?
First, a trust should have a bank account of its own. The related expenses of a bank account must be taken into consideration however small it may be.
Furthermore, if a property in a trust earns rental revenue, then the trust must be registered for income tax and payable to SARS for the related monies.
Thirdly, a trust must be maintained by proof in writing of any decisions or transactions. Trustee meetings will be held annually during the financial year to discuss and confirm decisions taken. In addition, most trust decisions should be taken together by the trustees and they will behave in the interests of all the beneficiaries.
Eventually, trusts are expected to draw up annual financial statements and will need to pay annual income tax in compliance with SARS regulations.
What are the tax implications of buying a property in a trust?
As for trusts, there are also other tax consequences. Trust instruments pay higher taxes than individuals do, and any income earned by a trust is now taxed at 45% per annum, with no available rebates. Capital Gains Tax is paid on any capital interest received by the Trust, which is taxed at a rate higher than an individual’s, but luckily also lower than the rate of tax on the estate. It is necessary to note that, when buying immovable property, Trusts are not excluded from transfer duty and are subject to donation tax in the case of donation of properties. While a Trust is an excellent way of securing properties, it is not suitable for everyone.
Profits in trusts shall be taxed at 45% unless the profits are allocated to the beneficiaries, in which case each individual beneficiary shall be taxed at 18% on the basis of the individual income tax tables set by SARS.
If the trust purchase the property without paying for it, the trust and the related trustees selling the asset will establish a loan account. Unless the property is not used for residential purposes and the loan amount actually reaches R1,333,333, interest at the normal office rate of 7.5% will have to be paid. The trustee of the loan account gets to select whether a 20% donation tax is charged on the interest, or whether the interest is declared as income directly in his or her private capacity.
The loan account in the trustee’s name will be seen as an asset. He or she will be aware of the consequences upon liquidation or death of such a loan.
There is no capital gains tax due when the time comes to sell the land. That is as long as you can show the trust’s beneficiaries have continuously lived there when the property was under the trust’s name. You don’t even have to pay income tax on earnings from the sale. Unless the house stays vacant, so you can also defer tax on capital gains for at least 18 months. This gives you an acceptable window of opportunity to sell the land. You will be responsible for the certain tax after this time has elapsed.
Circumstances can occur where you already own a second property and wish to take advantage of a trust to avoid tax on capital gains. You may still set up a trust in this instance which is called implicit trust. Make sure you let tax authorities know if your children occupy the house. Therefore, trust status can still be operated upon.
Moreover, if your children want to share the housing with friends, that doesn’t automatically mean you’ll have to pay VAT. As long as the friend’s rent is paid to the trust, they will rate it as rental income. There are other deductions that will be due before income tax. That is to say, you will report expenses and mortgage payments before any income tax is due.
And, if your child is not earning any other amount of income and the rental income does not exceed their personal allowance, there may be no tax to pay at all.
If you have correctly bought the property and given the initial deposit to the trust, and the mortgage is set up in the trust’s name, there will be no inheritance tax due should you pass. Nevertheless, the amount involved has limits. It applies only to money donated to the trust and unless you buy a house for your child, it is extremely unlikely that the donated money will count against inheritance tax. Money amounts you lend to the trust don’t incur inheritance tax.
You can appoint new trustees in the event of the death of one or both trustees so that the trust can operate as usual. However, if the trust’s terms state that the children will inherit the property upon the trustees’ death, then standard inheritance tax laws will apply.
What is the thing that is most misunderstood about trusts?
Trusts even though they are dormant need to be managed. Trusts that are not dormant must also be maintained to prevent the SARS and the Master of the High Court find it null and void.
There is a common assumption that if the trust assets are still held by the founder or trustees they will manage them as if they are their own personal properties. This is not the case as the trustees of a trust administer the trust property on the beneficiaries’ behalf.
A trust can be a useful tool for tax savings on death, but it should not be the only reason to choose to go down that path. Trusts can also be used to secure minors’ interest in the event parents pass away. In the event of parents dying and a property is not in a trust, then a testamentary trust can be used as an alternative to be established upon death, but in order to make use of this choice your life would need to be current.
If you don’t establish a trust, and you don’t have a will and minors are left behind, all of your properties are sold and handed over to the Guardian Fund of the Master of the High Court. The minor’s guardian would then apply for maintenance money to the Master which may be daunting.