How to fit a company between your trust and its properties
So, your trust owns investment properties and is liable for 45% tax on the net income. You read my article about how this should have been structured. Is it too late to put it right? Fortunately, it can still be done thanks to s42 of the Income Tax Act. You need to do an asset for share swap.
Here’s how it works –
You need to slip a company between the portfolio and the trust. Ideally, it needs to be a company that you newly form. Then the first issue of shares is in favour of the trust in exchange for the property portfolio. Section 42 allows this asset for share swap to be free of all taxes (Transfer Duty, VAT and CGT). Note that the shares must be newly issued, not transferred from another shareholder, that’s why you form a new company.
So what are the costs? Firstly the cost of forming the company which is about R2 000 and secondly the Conveyancer’s fees to transfer ownership of each property to the company. If the properties are bonded, then the bonds will have to be renegotiated and there is usually a cost involved.
Considering the significant reduction in tax rate from 45% to 28%, the costs are usually worth bearing.
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I’m.curious to know about the opposite of this article, where an individual that owns companies that own property wishes to transfer the directorship or ownership of the companies to a trust. How does Section 42 work in that case. He is not selling anything to anyone he is retiring and is transferring his business to be controlled by the trust.
Hi Thabo,
He’s out of luck. s42 is of no help whatsoever.
A trust cannot be a company director, but that is irrelevant.
He is selling (or donating) his shares to a trust and that leads to CGT (and Donations Tax if he donates).
If the company (only one) qualifies as a Small Business Corporation then the first R1,8m is free of CGT.
He also has an annual allowance of R40 000 gain before he pays CGT.
Thank you for your response Derek , so my understanding is that he is not selling anything ,he is just re structuring his business . So all his companies(7) own about 600 properties (vacant stands) so he has formed a trust which he is not a trustee but 3 of his long time employees are, now all these companies only have him as a director and now he is retiring at 85 so he tells me ,he ( his estate) will only be a 15% beneficiary then 85% to the Trust. So I thought there would not be any tax given that there is no transaction, no sale , no donations, no disposal of anything it’s just a business re structuring.
Hi Thabo,
Well, I’m afraid you’re wrong.