Tax implications of transferring property into a Trust explained

Gugs Mhlungu spoke to Certified Financial Planner, Paul Roelofse.  

Listen to their conversation in the audio clip below.

Many years ago, having a Trust was seen as fashionable because it gave you some kind of status symbol, says Roelofse.

He adds that Trusts are not what they seem and that it doesn't suit everybody.

What is a Trust?

According to investopedia.com, "A Trust is a legal entity with separate and distinct rights, similar to a person or corporation. In a Trust, a party known as a trustor gives another party, the trustee, the right to hold title to and manage property or assets for the benefit of a third party, the beneficiary."

"One important thing that should be noted is that no one trustee can be seen to be in control."

 - Paul Roelofse, Certified Financial Planner

The website adds: "Trusts can be established to provide legal protection for the trustor’s assets to ensure they are distributed according to their wishes. Additionally, Trusts can save time, reduce paperwork, and sometimes reduce inheritance or estate taxes."

"The big benefit or value proposition about a Trust is that everything inside the Trust has perpetual longevity and another big thing is asset protection."  

- Paul Roelofse, Certified Financial Planner

In South Africa, Trusts can hold various property types, including residential, commercial, or even agricultural properties.

What are the tax implications of transferring property into a Trust in South Africa?

An article by a leading South African law firm, PM Attorneys, answers this question with the following points:

The Basics of Property Transfer into Trust

South African law recognises two types of Trusts – the inter vivos (living) Trust and the testamentary (will) Trust. Transferring property into either of these has different tax implications. 

Capital Gains Tax (CGT) Considerations

When transferring property into a Trust, you will likely encounter capital gains tax (CGT). The property’s value, at the point of transfer, is considered for this taxation. This is often referred to as the “disposal value.”

Transfer Duty Implications

In South Africa, transferring property into a Trust usually invokes a transfer duty. This is a tax levied on the value of the property being transferred. 

Donations Tax Consequences

This comes into play if you donate the property to the Trust, rather than sell it. The donations tax is levied at a rate of 20% on the donated property’s value, with an annual exemption limit. 

Income Tax Implications

Trusts in South Africa are considered separate legal entities and thus, subject to income tax. 

Estate Duty and Trust

The major advantage of transferring property into a Trust is the potential estate duty savings. 

"The one big downside is that Trusts pay the highest rates of tax in South Africa. We pay a rate of 45% across the board which means that you generally pay higher capital gains tax and you don't get any exemptions as an individual if you dispose of a property."

- Paul Roelofse, Certified Financial Planner

*Always seek expert advice before making any financial decisions.