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Industry & Real Estate

Tuesday, 02 February 2010 12:41

A duty-free window on residence transfers

{pp}For two years a window is open on the transfer of residences from juristic persons to natural persons. There is no Transfer Duty, and CGT rolls over to the ultimate sale of the residence.

Moreover, a company or CC that has been wholly owned since February 11, 2009, by a natural person, or a married couple, may benefit from the same window. So may a Trust, where the residence was effectively financed by a natural person who has lived in the residence since that February date. But although it had been argued that the window should stretch to Trust-owned companies as well, it does not go that far.

This window period expires on December 31, 2011. SARS’ view is that the previous window period, which ended in September 2002, provided likewise and anyone now taking advantage of these provisions should not be better off. How does the legislation apply where for instance an offshore Trust holds all the shares in a local Company which in turn owns a residence? There is no relief, even where the Trust is a genuine one. The legislation requires the Company’s shares to be directly held by a natural person. If as much as one share is held by another person, even a son or daughter, the exemption does not apply; nor if the spouse funded or part-funded the Trust in acquiring the property or financing the bond.

The tax effect of this legislation is that where a house with a base cost value of say R1 million is owned by a Trust or Company, transfer will be effected according to the base cost, even if the market value is R10 million. By the rollover provision the natural person takes over the Company’s or Trust’s CGT rights and obligations, stepping in all respects into the shoes of the Trust or Company. Crucially, the legislation overlooks the consideration that if the residence is worth R10 million the person taking transfer will add that amount to his/her dutiable estate. It therefore makes sense for the Company or Trust “disposing of” the residence to a natural person to sell at market value by way of a loan account in the Company/Trust so that the person’s estate has an asset worth R10 million and a loan liability of R10 million. Otherwise SARS will obtain an estate duty benefit of some 20% of market value upon that person’s death! This seems to be an unfair advantage. It also seems to support our view that the demise of Estate Duty is on the way.

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