Why buy a property in a Trust?

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This is a very important question as one often hears about people buying properties in a trust and that it’s the “best way to invest”. It may be, but it may also not be as that really depends on your investment strategy and your long-term plans.

If you’re new to the topic why not start off with the post on “What is a Trust?” just to get an overview of what a trust is and why one would consider starting one.

Take a listen to the on-air discussion about this Cape Talk radio.

Why buy a property in a trust?

A really great reason why you would want to buy a property in a trust is that it will be protected for future generations. If the home you live in is owned by a trust then it won’t form part of your estate when you die and there will not be any taxes involved. Thus, the asset remains in your family and you save potentially hundreds of thousands.

Similarly, if the trust owns a property which is rented out, then that asset and income is protected for future generations.

That is really awesome, but there are also some ‘bad’ sides to owning properties in trusts.

Before jumping onto the “trust bandwagon” you should really speak to a trust specialist to understand all the implications of a trust. Also remember that your Trust Deed is the most important aspect of the trust as it dictates what the trust can and cannot do as well as all the terms and conditions. It is worth your while to pay an expert to draw this up!

What are some of the considerations?

Some considerations to to be aware of:

Trusts are taxed at the highest rate when it comes to Capital Gains Tax and Transfer Duties so selling a property from a trust will probably cost more than if it was in your personal capacity. However, if you don’t plan to sell the property then that won’t be a problem.

Rental income (or other income) will be taxed at the highest bracket if it derived within a trust. There are ways to structure your taxes as efficiently as possible but you will need the help of an accountant who understands your trust.

Trusts cost money to run as you need Annual Financial Statements and it is highly recommended to pay for a qualified independent trustee.

Trusts do add a level of complication in regards to admin and general finances.

What happens if I already have a property and want to move it to a trust?

Moving a personally owned property to a trust will in fact be a normal sale of a property with you as the seller and the trust being the new buyer. This will immediately incur Capital Gains Tax, Transfer Duties and Attorney Fees. Thus, it could be an expensive exercise.

Also, if the trust doesn’t actually have the cash on hand to purchase the property then you will need a loan account and the trust will own you money. This loan account is subject to a minimum of 7.75% interest (as at 28 Feb 2018)

As an example, if you sell your property to the trust for R2 million, you will need to charge the trust interest at an annual rate of 7.75% which will be R155,000 (presuming the loan is for 1 year)

If the trust can not pay you the R155,000 due in interest, the amount will be treated as a donation in terms of the new Section 7C of the Income Tax Act and the following will happen:

  • The unpaid interest amount of R155,000 is treated as a donation to the trust;
  • The first R100,000 is exempt from tax due to falling beneath the donations exemption;
  • Donations tax of 20% is levied on the balance of R55,000;
  • The trust must pay donations tax in the amount of R11,000.

So selling your property to a trust can be expensive and complex. There is an option called a Usufruct, but that is a whole new kettle of fish and has it’s own complications & limitations.

Bottom line: Educate yourself first!

What happens if I want to move a property out of a trust?

Selling a property from a trust works like a normal property sale. The only difference is that Trusts are taxed much higher than individuals. The process is the same though as a normal sale. You would need a signed resolution from the trustees and then follow the process as dictated by the transfer attorneys.

In closing

Trusts can be great investment vehicles to grow your wealth as a family and protect the wealth for future generations. But, they can be complex and costly to run. A trust should form part of a long term wealth creation plan and should definitely be done with the help of an expert.

Please share your thoughts