The new amendment to the taxation laws, with regard transferring residential properties in a company, close corporation or trust, into one’s personal name, has been widely publicised but owners be warned - do your homework before you leap to get a 22% tax saving on your property.
But just in case you're still in the dark... If you own your primary residence in the name of a company, close corporation or a trust, you have a window period until December 31, 2011 to transfer this property into your personal name, without incurring transfer duty and capital gains tax.
However, whenever a government department extends a helping hand, it comes with certain limitations.
- The property must be used primarily as a residence. You must be living on the property from at least February 2009. Residential properties used for business, holiday homes, or buy-to-let investments do not qualify for this benefit. If the property is in a trust, you will need to seek legal advice to establish if you qualify for this dispensation, as there are a number of restrictions pertaining to trusts.
- If the property is mortgaged, you will have to cancel the existing bond and re-apply for a new home loan. Giving the banks current strict credit criteria, best you first establish if you will qualify for the bond. Furthermore, you need to bear in mind that the banks are not offering interest rates as favourable as they were a couple of years ago. If you are currently enjoying prime less 2%, you probably will have to settle for a lower interest rate discount, if any at all.
- People wanting to do this, can only do so if they are the donor or the person who financed the property. Thus properties owned by a company, which in turn are owned by a trust, will not be included. It will also therefore not apply to someone who bought a plot in Summerstrand for instance, and transferred it to a trust with his five daughters as trustees and is now at a stage where he would like to sell, in order to buy into a retirement village.
- Don't overlook the costs involved in cancelling your existing bond and registering a new bond. Make provision for bond cancellations costs, new bond registration costs and banks' initiation fee. These figures will differ depending on the size of the new bond you wish to register. I will be able to give an indication of such costs.
- As you will be cancelling one bond and registering another, you need to give the bank three months notice of your intention to cancel the bond in the name of the entity, failing which, you will be liable for three months penalty fees.
Section 57 of the Deeds Registries Act 47 of 1937 makes provision for merely substituting one mortgagor with another, costing 50% less than having to register a completely new bond. However, most banks are hesitant to entertain a "substitution of debtors" transaction. One can only speculate that they may be concerned that their security will be compromised if the mortgage bond document is merely annotated to reflect the new mortgagor.
While this article serves as a warning to do your homework before you leap, it is not intended to deter you from taking advantage of this tax break. Don't be penny wise and pound foolish. The capital gains tax (CGT) saving when transferring ownership of a primary residence in the name of individual, compared with selling out of an entity is substantial enough to deserve your consideration.
Then there is the issue of the risk to the asset, which is probably why you didn't purchase the property in your personal name in the first place! But this is another topic for another day...