The Double CGT Trap
It was once fashionable to hold property in a company, so that when you wanted to sell it, you sold the shares only and the purchaser avoided Transfer Duty, so you got a better price. That led to a structure like this.
This assumes that the properties cost R10m and are worth R40m when you die. The company must have borrowed the R10m to buy the properties, so it is worth the gain in the properties’ value.
Despite changes to the legislation relating to residential properties, which we deal with in Step 9, the structure persists to this day. Now let’s look at the taxes that kick in when you die – I’ve rounded the figures.
You assets consist of your shares in the company, which are worth R30m. You are deemed to have sold them to your deceased estate at the moment of death at market value and, in doing so, to have made a capital gain of R30m.
CGT is payable on the gain at 18% and that amounts to R5,4m
Then Estate Duty is based on the value of your estate, R30m less 3,5% Executor’s fees of R1,1m and the CGT of R5,4m. So your dutiable estate is R23,5m and Estate Duty at 20% will amount to R4,7m.
Your estate is in for tax and executor’s fees amounting to R11,2m.
The money has to come from somewhere, so R16,8m worth of the properties will have to be sold, again by a distressed seller.
But the properties are owned by the company, so the company will pay CGT at 22,4% on the capital gain it makes when it sells the property – another R2,8m in tax. That’s the Double CGT Trap!
Then, because the money is needed by the deceased estate to pay its taxes of R11,2m, the company will have to declare a dividend to its shareholder, the deceased estate. The dividend will have to be R14m from which 20% Dividends Withholding Tax of R2,8m will be deducted.
From an estate that is worth R30m, R16,8m has gone in tax.
Never, never, never hold your growth assets in this way.