Author: Nicolas Nel
Purchasing a property for many South Africans is the biggest financial decision they will make in their lifetime. In most instances an individual will purchase a property in their personal capacity. There are, however, other options. One such option is purchasing a property through a trust. When purchasing a property through a trust, the trust will hold the asset on behalf of the founder and for the benefit of the beneficiaries. This comes with its own set of pros and cons.
The largest benefit of a trust pertains to its perpetual existence. Similarly, to companies, the existence of a trust is not tied to the life of any individual. When an individual who owns property in their personal capacity passes away, the fees involved in the transfer of the property can be high. On top of paying attorney fees, estate duty as well as capital gains tax may be payable. However, should the property have been held in a trust, these fees would be negated as transfer is not necessary.
On the other hand, setting up a trust can be a costly exercise. Furthermore, as the trust is the owner of the asset and not the founder, the founder does not have independent control over the asset. The trustees, as appointed in the trust deed, manage the trust and the assets thereof. To obtain more control over the trust, founders often appoint themselves along with their spouse as the trustees. The risk here is if the management of the trust is clearly in control of the founder, or the founder’s spouse, the revenue authorities will see the trust as a vehicle of convenience. Should the trust be seen as a vehicle of convenience, the trust assets and trust income will be seen to vest in the founder and not in the trust. Further, it is worth noting that if the investment property is your primary residence, the capital gains tax exemption on homes is not applicable to properties owned by a trust.
Determining whether to purchase a property through a trust or in your own name depends on many factors, often unique to each individual. It is advisable to seek advice from one of our experienced attorneys before taking the step of creating or managing a trust.