Aligning the legal structures of your investment properties is exceptionally important in the long run. This requires careful consideration of legal and tax intricacies as well as your long-term plans with your investment.
But is the trust the right thing for my investment property? Or is it better for a family home or primary residence? How do I get the property into the trust? Let’s chat about all of the above including the tax implications
What is a trust and why should I get a trust for my property?
A trust is a legal arrangement whereby control over property is transferred to a person or organisation (the trustee) for the benefit of someone else (the beneficiary). You can register two types of trusts, namely the inter-vivos trust and the testamentary trust.
South African Government Official Information
In short, an inter vivos trust is a trust that is established while the person is still alive, whereas a testamentary trust is established when people are already dead – and they requested in their testament that their possessions should be moved into a trust. Property investors tend to be more interested in inter vivos trusts because they’re not dead yet.
What is a trust and why do I need it for property investment?
Trusts are used as a way to ringfence your property investments, limit liability, reduce tax burdens and get more rental income for your buck in the long run.
If you die, you will need to pay lots of taxes. Luckily trusts don’t die!
Concerning tax and trusts, let’s consider if an investment property in a trust gets rental income, the trust can pay out all proceeds/profit to the beneficiaries. the beneficiaries need to pay tax on the proceeds. You can therefore make sure to spread the wealth in a way you desire.
Furthermore, if it is rental income, each beneficiary will pay tax on it at their normal tax rate, which makes the tax burden a lot lighter.
You can still claim Section 13sex in tax breaks in a trust!
How do I get my investment property in a trust?
Moving your property from your name into a trust can be challenging. You have very few choices, but the basic idea is that you would need to transfer it through the regular transfer attorney route. If you’re transferring from your name into a company, you can easily use section 42 asset for share transfers – but trusts, unfortunately, do not work as companies do.
Selling your property to the trust
This method, while common, triggers both Capital Gains Tax (CGT) for the seller. CGT can eat into your profit, and therefore it’s worth calculating the cost. If you’re a natural person (not a trust or company), the first 40% of proceeds are not taxable, and only 40% of the remainder is taxable by your normal tax rate.
Transfer duty will also be triggered for the trust – who would need to pay transfer costs as well as transfer duty if the property is more than R 1 million.
Donation of your investment property
Legally, SARS allows a person to donate up to R 100 000 per annum. Donations above R100,000 per year incur donations tax. Donations tax has a flat rate of 20% on the value of the donation up to R30 million, and at a rate of 25% on donations over and above R30 million. It isn’t unheard of for affluent people to donate R 100 000 per year to their trust to lighten their tax burden.
Trusts and tax for property investors
Beneficiaries can lighten the tax load of a trust. It’s highly convenient to spread your income tax efficiently to multiple beneficiaries. Let’s say you’re making R 100 000 per month in profit, you can distribute this to multiple beneficiaries where this will be taxed at their normal tax rate.
Note that capital gains tax will still be taxed as CTG when it’s paid out to beneficiaries
Another great way to save on tax within your trust is to use Section 13 sex of the tax act if you have 5 or more new or unused properties. If you’re looking for more info on this, check out the Section 13 sex article where you will find a wealth of knowledge and examples.
Benefits and Risks of transferring a property into a trust
| Trust Benefits | Trust risks |
| Asset Protection: – Shields property from creditors, ensuring its future benefit for beneficiaries // Generational wealth | Loss of Control: – The trust now controls your investment properties through the trustees |
| Estate Planning: – Flexibility in the distribution of assets/property and income/proceeds | Control Over Property Use: – Set terms in the trust deed to regulate property use. |
| Tax Advantages: – Potential minimization of estate and capital gains taxes. | Financial // tax Implications: – Potential additional tax liabilities and more financial admin costs |
| Privacy: – Trust ownership offers a degree of confidentiality. | Potential Challenges: – Challenges to trust validity from creditors or courts. |
| Cost and Complexity: – Administrative costs and complexity of establishing and managing a trust. | Loss of Flexibility: – Fixed terms may limit adaptation to changing circumstances. |
Conclusion
Trusts offer significant benefits such as asset protection, estate planning advantages, and tax efficiency. They can shield properties from creditors, facilitate flexible distribution of assets, and potentially minimize estate and capital gains taxes. Additionally, trusts provide a degree of privacy and confidentiality in ownership.
The limited liability and fewer fees payable when you die come with a trade-off – extra complexity of your investments and estate. But for large players and people serious about property investment, this could be very a valuable strategy for wealth preservation and generational wealth
