Transfer of fixed property from a trust to a new company to be owned by the trust
It often happens that a trust owns investment property that would be better held by a company which is, in turn, owned by the trust. This is because companies pay 28% Income Tax whilst trusts pay 45%. So, how do we give effect to this without incurring a lot of tax?
Fortunately, s42(2) of the Income Tax Act comes to our rescue as far as CGT is concerned. Provided the property was held for investment and not trade (that is, not with the intention of selling it at a profit) and provided it is transferred to the company in exchange for the issue of at least a 10% share, then the transaction is deemed to have been at the trust’s Base Cost and no CGT is incurred. This is best done by the formation of a new company so that the first issue of share capital can be in favour of the trust, but we would normally consider that the trust should own 100% of the shares. Failing that, if the company already exists (such as a shelf company), it must issue sufficient new shares to the trust that the trust ends up with at least 10% of the total shares.
s9(1)(l)(i) of the Transfer Duty Act is equally generous, and no Transfer Duty will apply.
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Creating a property investment company and transferring my house to the company.
Hi Stephan,
Don’t issue the shares to yourself. This would be the worst possible structure.
If it is your primary residence, it is usually best to keep it registered in your own name because of the R2m allowance before CGT. If it is an investment property (for rental) then it should be held by a company that is itself owned by a trust.
If you are getting into property investment, read the free sample of my book “16 Steps to Wealth” here http://www.16steps.co.za
If you go the trust route, have a meeting with me first. https://harbourassociates.youcanbook.me/
I hereby need advice on how to start the process of the Trust to Pty (Ltd).
Hi Chris,
Before doing anything relating to trusts, you need to chat to me on Zoom. It’s too important a step to mess up. Here’s the link to my diary https://harbourassociates.youcanbook.me/
I currently have 3 unbonded properties held in a Pty LTD 1 which is a vacant land, the 2 properties generate rental income.
What would be the applicable taxes if I want to transfer the ownership of the shares to the new family trust which I plan to setup.
Hi Mv,
Before you do anything –
You definitely need to read my online book “16 Steps to Wealth” which you will find here http://www.16steps.co.za
You also need to book a Zoom meeting with me here https://harbourassociates.youcanbook.me/ There’s never a charge for meetings.
You need to get this right first time.
My wife and I are beneficiaries in the family trust . The trust owned a share in a Share in a Share Block Co. The share was worth R750,000 and was transferred into a (Pty) Ltd. Company at a value of R2m . The trust did not sell the share and no money changed hands .
Is CGT payable by the Trustees , if so , how will this be calculated .
It seems that this was an s42 asset for share swap. For clarity’s sake, the way I read your comment is that new shares were issued to the trust by the company in exchange for the property. If this was done properly, and you should read s42 of the Income Tax Act to be sure, then no taxes apply. i.e No CGT, no Transfer Duty, no Securities Transfer Tax. The only cost is the conveyancer’s fees.