Transfer Duty on sale of a company owning residential property
Once upon a time, you could sell the shares in a company that owned fixed property and only pay Securities Transfer Tax (1/4%). Then in December 2002 it all changed.
That was a long time ago, but many people still don’t understand the full implications, so here they are –
A Residential Property Company is one which owns a dwelling or dwellings and their fair value exceeds 50% of the assets of the company, excluding financial instruments.
If shares in that company are sold, then the shares are treated as fixed property and the sale attracts Transfer Duty, not on the value of the properties, but on the sale price of the shares. If the buyer and seller are connected persons, then the sale will be deemed to have been made at market value. Anyone can determine this market value, but SARS can (but seldom does) challenge the valuation.
The rates of Transfer Duty are –
It is the purchaser who pays the Transfer Duty, whilst the seller pays any Capital Gains Tax. Securities Transfer Tax is not payable under these circumstances.
Only a registered conveyancer can submit a Transfer Duty return.
This only applies to residential property and not to commercial property.
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Hi Derek
We have a CC that owns land and another land owning PTY, one of the shareholders(26%) has a company that also owns land. we ould like to purchase/transfer that company into the CC. Say the value of the land owned by the 26% shareholders company is R10m. How should the taxes / duties be calculated? Is there a split?
Hi Nic,
If my reading is correct, the fact that the owner of the other company owns 26% of your company is not relevant.
What you have is a person who owns 100% of a company worth R10m selling the shares to a CC.
There is Securities Transfer Tax of 0,25% = R25 000 payable by the CC and Capital Gains Tax payable by the seller. If the land is zoned as residential, then there’s also Transfer Duty payable by the CC on the value of the shares (R10m) = R897 600.
What strikes me as that none of these companies are held in a trust, so you can all expect to lose between 1/3 and 1/2 of your wealth in taxes when you die. Maybe you need to read my book “16 Steps to Wealth” which you will find here http://www.16steps.co.za and then book a Zoom meeting with me here https://harbourassociates.youcanbook.me/ I never charge for meetings.
Where a cc is sold and the only asset is a fixed property, do you load the transfer duty declaration like a normal sale of property? Never done one before.
Hi Danie,
I’ve never done it either, but according to SARS you can submit the Transfer Duty return on efiling.
Be careful. the “property” is the membership of the CC, not the land and buildings. So, the value is the value of that membership, which may be much lower if the CC has and debts.
Good morning
I am an Property Professional selling residential properties.
My Seller’s property is registered in a (Pty) Ltd.
Is currently marketed for R8,5 Million.
The Seller wants to sell the shares in his company to the Purchaser.
The Seller is the sole director.
His company is not trading.
There is no outstanding loans.
His financials are in order.
The company is not VAT registered.
The property is his primary residence.
The Purchaser also has a company. He wants to buy the property and is willing to buy the Seller’s shares (the company).
Is transfer costs payable by the Purchaser?
What is the value of the property?
If the Purchaser has R5,5 Mil cash and needs a R3 million bond from the Bank, is it a loan from the Bank to his company or the company he purchases or is it bond on the property?
Is it advisable for the Purchaser to buy the Shares (Pty) Ltd, or a better option for his company to purchase the property from the Seller’s (Pty) Ltd and register it in his own company’s name?
Does this transaction take place at the CIPC and the Deeds office or just the CIPC? Which means the deal is structured by a Conveyancing attorney, not on the Realty company’s documentation at all?
With the property being an asset of the Seller’s Company, will he pay CGT on the proceeds of the sale of the property or company taxes? ( I assume the property (asset) might have a different value on the company’s books than what he is selling for.)
What is the asset value of the property then on the new company’s name?
Your assistance will be much appreciated.
Regards
Hi Joey,
That’s a multiple faceted bunch of questions. I have responded by email.
That response via email defeats the objective of knljne threads. Paste here please.
Good point Morne,
Here’s the email My response is in italics
Good morning
I am an Property Professional selling residential properties.
My Seller’s property is registered in a (Pty) Ltd.
Is currently marketed for R8,5 Million.
The Seller wants to sell the shares in his company to the Purchaser.
The Seller is the sole director.
His company is not trading.
There is no outstanding loans.
His financials are in order.
The company is not VAT registered.
The property is his primary residence. Not as defined, because he does not own it.
The Purchaser also has a company. He wants to buy the property and is willing to buy the Seller’s shares (the company).
Is transfer costs payable by the Purchaser? The sale of a residential property company is a sale of property (the shares) as defined in the Transfer Duty Act. Therefore, Transfer Duty will be payable on the selling price of the shares.
What is the value of the property?
If the Purchaser has R5,5 Mil cash and needs a R3 million bond from the Bank, is it a loan from the Bank to his company or the company he purchases or is it bond on the property? It is a loan to the new shareholder, be it him or his existing company.
Is it advisable for the Purchaser to buy the Shares (Pty) Ltd, or a better option for his company to purchase the property from the Seller’s (Pty) Ltd and register it in his own company’s name? The problem with buying a company is that there may be skeletons in the cupboard, such as suretyships that the company has signed on some other loan. You will have no way of discovering them. The Transfer duty will be the same either way, but if he buys the shares, there’s no conveyancing costs, only the cost of the share transfer.
Does this transaction take place at the CIPC and the Deeds office or just the CIPC? Which means the deal is structured by a Conveyancing attorney, not on the Realty company’s documentation at all? Deeds Office if the property is sold. Change of Director at CIPC if company sold, plus a new Beneficial Ownership Return to CIPC because of the change of shareholder.
With the property being an asset of the Seller’s Company, will he pay CGT on the proceeds of the sale of the property Company will pay CGT if the company sells the property (on selling price – base cost).or company taxes? ( I assume the property (asset) might have a different value on the company’s books than what he is selling for.) He will pay CGT if he sells the shares (on selling price – issued cost of the shares, probably R100)
What is the asset value of the property then on the new company’s name? If it bought the property, then the purchase price. If it bought the shares, then the Investment in Subsidiary would be the Net Asset Value of the company (Share Capital + Retained Earnings) and Goodwill the purchase price minus the NAV.
Hi there
When there is a sale of shares from a property holding company, do you just submit the normal transfer duty declaration. there is no option for “sale of shares”
Thanks very much
Hi Jenna,
I have never submitted a Transfer Duty return for the sale of shares in a Residential Property Company. However, be careful. It is the shares that are the property that is being transferred, it is not a deemed transfer of the residential property itself. So, the value of the property in this case is the value of the shares, and this may well be a much lower value than that of the residential property, because it will be Net Asset Value, which is Assets minus Liabilities minus Share Capital.
I have a PTY Company with 2 properties registered in the Company name. I want to sell a part of the business and one property to a cash buyer. A bond would then be settled on the property they bought. How do we transfer the property into their name, or can they just become Directors and take over the property? The balance of the funds will be used to settle existing company debts. What type of taxes have to be paid? Thank you for your advice.
Hi Martin,
If the property is residential, then it’s a typical sale in that the purchaser will pay Transfer Duty (it’s a slidong scale) and your company will have to pay CGT at 21,6% if the property has gained in value.
If the property is commercial then it’s a different ball game.
The company would also sell the part of the business that you mention and, again, pay CGT as the business cost nothing.
Your director idea does not work.
If you would like to discuss the transaction with me, then book a meeting via https://harbourassociates.youcanbook.me/ I never charge for meetings.
Hello Sir, I have a question that i cant seem to find an answer to, in the event that a developer of a registered HOA decided to sell his shares within his company, a company that owns the remaining unsold stands within the estate, of which this is a residential estate, the purchaser of such shares would be liable for transfer duties, and if i am understanding correctly, would thus become liable to pay levies to the HOA on these very stands?
Curently the developer does not pay levies which is well understood and accepted, however should he sell his shares to another party, he feels that the nothing changes and the agreement we have with him remains in tact, however several members of the HOA understand this to be a transfer and thus the buyer will be liable for levies for all the unsold stands, do you perhaps know which way this would go?
Hi Michael,
I personally have no doubts. The company is a separate juristic person. It developed the estate and, as is usually the case, it has been granted an exemption from levies on empty stands. Who the shareholder of the company is, is irrelevant to that right. The only exception to this would be if the Rules of the HOA clearly stated otherwise which does not appear to be the case.
I hope this helps.
Hi – I’m a member in a 4-member CC which owns a house converted to office use and zoned residential. Each member owns 25% of the CC’s shares. The bond is paid up but there are two members’ loans totalling nearly R600k. The median of several property valuations is R1.5 mil, which tallies with the municipal valuation. Two of the members (a couple married in COP) have been investment partners from inception, while the other two have been owner-occupiers whose business entities pay rent to the CC. The investment members now want to sell their shares and exit the CC. One has a member’s loan of just over R300k. The other two members want to remain as owners, either by buying out the departing members or by agreeing to a third party buyer purchasing their shares. One of the remaining owners has a member’s loan of about R285k. What is the most appropriate value to attach to the would-be departing members’ shares?
If there are no other assets or liabilities, then the net assets value (NAV) of the CC appears to be R1 500 000 – R600 000 = R900 000
That puts the value of 25% at R225 000.
The one shareholder’s loan of R300 000 will need to be repaid as well.
An alternative way of valuing the CC is to present value all future net rental income.
And a third way is to take the net profit after tax and multiply it by about 4,3
If you do multiple valuations, then you take the one that produces the highest value. But i don’t think you need to go that far.
A valuation is just a starting point. The actual value is that which the sellers and the buyers are prepared to accept.
Why is the payment of transfer duty not applicable on the sale of shares of a company owning only commercial property ?
Hi Andre,
s1 Transfer Duties Act.
Definition of Property
(d) a share (other than a share contemplated in paragraph (g)) or member’s interest in a residential property company
Note that the “property” that gets transferred is the shares, not the residential property itself. This is important because the residential property might be worth R3m but the shares might be worth zero. For example if you lent the company R300K for the deposit on the bond and the rest was bonded for R2,7m, the company would have an asset of R3m and liabilities of R3m, so the shares would be worthless and no Transfer Duty would be paid.
Thank You
Hi there
I own the shares in a company that owns a rental income property.
According to the latest municipal valuation, the property is valued thus:-
Business and Commercial R1621460; Residential R978540.
Would SARS treat my company purely as a COMMERCIAL property owning company?
Would transfer duty be payable if I sold the shares in the company and how would the transfer duty be calculated?
Thank you for your kind attention.
Hi Victor,
It depends entirely on the zoning. If zoned commercial, then it is commercial. If zoned residential, it is residential.
Transfer duty is payable if zoned residential, but not if zoned commercial. It is the shares that are treated as property, so the transfer duty is based on the selling price of the shares.
CGT may also apply.
I hope this clears it up for you. Feel free to book a Zoom meeting here https://harbourassociates.youcanbook.me/ if you want to chat.
Hi There,
I am trying to get clarity on what the requirements and/or obligations are of the Chairperson when the shares of the residential property company are sold and Transfer Duty are payable.
Thank you.
HI Eugenie,
I’m not sure who you mean by the Chairperson. Transfer Duty is payable by the purchaser of the shares, but be careful. It is the shares which are deemed to be property and it is their sale price that attracts the duty, not the fixed property itself. This means that if the company had fixed property of, say, R5m and debts of say, R3,5m then its net asset value (i.e market value) is probably R1,5m and Transfer Duty is payable on R1,5m minus the R1m allowance. Transfer Duty returns can only be submitted by a conveyancer.