Just Not That

What are the transfer duty and capital gains tax implications of moving property into a trust?

Movable assets (furniture, vehicles, clothes) can be moved into a trust by selling it to the trust or donating it to the trust. Moving property into a trust is however not that simple, as transfer duty and capital gains tax (CGT) is payable.

Lets look at an example.  I would like to move a property worth R600000 into an inter vivos (living) trust.

Transfer duty when buying in a trust

Using the ooba calculator the total costs for buying a R600k property in a trust are as follows:
Total bond costs: R 13 651.00
Total transfer costs: R 59 373
Grand total: R 73 024

The transfer duty for trusts is currently 8%, so R48 000 of the above R59 373 is transfer duty. (See footnote #)

Lets now see how a usufruct can be used to save transfer duty when moving property into an inter vivos trust.

Transfer duty with a usufruct

In order to determine the transfer duty payable when you (usufructuary) moves the property into a trust (bare dominium holder), one must determine the value of the usufruct and bare dominium respectively.

First determine your age factor from Table A to the Regulations under the Estate Duty Act – Regulation: R1942 of 23 September 1977 – e.g. Male who will be 40 at his first birthday after the transaction = 8.04030

Usufruct value

Fair value of property x 12% x age factor = R600 000 x 12% x 8.04030 = R578 901.60
The 12% in the above-mentioned formula represents the yield prescribed by the Estate Duty Act 45 of 1955 and is used when the true yield (e.g. rental) is unknown.

Bare dominium value

Fair value of property – Usufruct value = R600000 – R578 901.60 = R21 098.40

In this case the seller (you) retains the usufruct, so transfer duty is levied on the value of the bare dominium that the purchaser (trust) acquires.
Transfer duty: 8% x R21 098.40 = R1687.87
Total saving: R48 000 – R1687.87 = R46 312.13

Capital Gains

Capital gain is equal to the amount by which the proceeds received or accrued in respect of that disposal exceed the base cost of that asset.

Proceeds of sale

Bare dominium value = R21 098.40.

My understanding is no CGT payable.

New base cost for trust

Bare dominium + expenditure directly related to the acquisition or disposal of that asset = R21 098.40 + transfer costs + bond costs etc.

The implication of this is that the trust will make a huge capital gain when it sells the property. So if the trust does not keep the property for a long time, the costs and tax implications may not make this worthwhile.

What is a usufruct?

What actually happens is that the title is separated into ownership and limited real rights (usufruct):
The property is owned by the bare dominium holder, who can do almost anything with the property (subject to the usufruct).
The other party (who has the usufruct) has the use of the property but may not sell the property. On his/her death the usufruct usually reverts back to the bare dominium holder who then regains full title.

Notes

• Transfer duty is payable on the higher of the following values:
  • the purchase amount payable
  • the declared value or
  • fair market value
• If you acquire fixed property on behalf of a trust before a trust is formed, it is seen as two transactions. In that case transfer duty is payable first in your own name and again on behalf of the trust.
• SARS allocates a term to the properties by using a formula. Should you sell the properties within that term, you will have to pay whatever transfer duty you saved on initially as well as the CGT applicable at the time of selling.
• Get professional advice.

References

SARS – Capital Gains Tax (CGT) – FAQs: Usufructs
INCOME TAX ACT NO. 58 OF 1962, Eighth Schedule

SARS allocates a term to the properties by using a formula. Should you sell the properties within that term, you will have to pay whatever transfer duty you saved on initially as well as the CGT applicable at the time of selling.

# Transfer duty were reduced from 2011-02-23, no transfer duty is payable up to a purchase amount of R600 000, above that a sliding scale applies.