A property is generally one of the biggest investments you could make and the entity (personal/ company/ trust or close corporation) you choose to purchase your property in could have a major impact on your finances and the long-term handling of the property. The answer in respect of which entity you choose is not a simple one as there are numerous factors that must be taken into account in terms of what you looking to do in the long term and what your aim is with the property.
In most cases of a standard purchase of a primary residence, it is registered in the names of both spouses. However, this may not always be ideal. Here are some examples where a different ownership set up would be better:
- One spouse owns a high-risk business who could be sued for negligence or a creditor could bring a claim against them:In such circumstances it would be better to register the home in the other spouse’s name so that in the event of the former’s insolvency the family would at least retain their home.
- The purchasers are not married, but living together:The property can be registered in both partners’ names, but co-ownership can be problematic if the relationship sours. A separate agreement should be entered into by the partners to cover the consequences of a break up. This agreement would cover items such as who has the right to stay on in the property and at what rate and price the staying partner may purchase the leaving partner’s share.
- A husband is 75 years old and his wife is 60 years old and they have an average size estate.It would probably make sense to register the property in the wife’s name as her life expectancy is a lot more than her husband’s and on his death no property transfer will be necessary, thereby saving transfer costs. Should the husband survive the wife and inherit the home there will be transfer costs, but no transfer duty will be payable.
- An elderly couple sells their home, which is registered in both their names, for R4 million and wish to purchase a new home for R4 million.The wife also has a large monthly pension and investments, but her husband has no pension or other assets: In such circumstances it would be better to register the new home in the wife’s name using some of her investments to make up the shortfall and the husband should invest his 1/2 share of the home which has been sold.At a 7% return on R2 million, this would bring an income of say R140,000.00 and mean they would pay no tax on such income, thereby saving about R5 000.00 per month for the family as a whole if the wife’s marginal tax rate was 40%.In addition, the wife will no longer earn income on the additional R2 million capital she needs to contribute to the new home, which will likely also reduce her marginal tax rate.
- A father and daughter decide to purchase a home to be used by the daughter as her primary residence and the father pays a deposit equal to half the value of the home.The father might want to register the home in both their names, but then his daughter would, on resale, forfeit half the value of the primary residence capital gain rebate in respect of the home. It would be wiser for the father to register a bond of security rather than take transfer of half the home if he is concerned about his investment.
- An investor who has three minor children buys three flats using 100% bond finance to rent them out and intends buying a few more flats:A trust would appear to be the best option as income earned in excess of the interest payment could be allocated to beneficiaries, thereby ensuring a lower tax rate for the family as a whole. In addition, the trust income which is allocated but retained in the trust could be utilized to purchase further flats without Section 7C of the Income Tax Act being a problem.
- A person with no children buys ten flats to rent and intends purchasing many more:A company appears to be the best option as rental retained in the company and utilized to purchase further flats would only be taxed at 28%. If registered in the name of a person or trust, the rent would attract income tax at a much higher rate than 28%.The company shares should ideally be held by a trust to minimize estate duty, but one must ensure that section 7C of the Income Tax Act is properly considered.
As every person’s circumstances are different, we need to look at each person’s particular situation when advising on property ownership. In addition, it is also possible that more than one of the above factors applies to a person and that in turn could further affect the decision as to what entity should purchase the property.
The decision as to which entity you use is of vital importance and could have major future financial consequences for a person and their family. For this reason, it is important to consult with an attorney with property, trust, company and estate planning experience before making a decision.
Contact one of our conveyancers on 021 943 5111 for further advice or assistance with this topic and other property related topics. We are happy to be a part of our clients’ experience before, during and after their property transfer, making the experience as smooth and understandable as possible.
(*So as not to complicate matters we have, in respect of the examples, above assumed that the R40 000.00 yearly capita/ gains tax rebate for individuals and R300 000.00 capita/ gains tax rebate for estates has been utilized).