Is It Still Viable To Buy Or Hold A Property In A Trust – Summary Of Tax Implications

TRUSTS AND TAXATION

With the changes introduced in this year’s Budget one might wonder if holding a property in a trust is still viable. In summary, SARS are focused on getting taxes now, rather than waiting for death of the taxpayer.

Trusts have always been popular, especially when it comes to estate planning and protection of assets. The reasons for creating trusts have included:

1. Protection From Creditors

To offer trust assets protection from creditors the essential elements for the trusts’ establishment must be present and the trust must be properly administered.

The following are essential in the establishment of a trust:

• A trust deed must be signed and accepted by the founder and all trustees.

• At least one trustee must be appointed, although in practice it is recommended that there is more than one trustee be appointed (preferably, an independant trustee).

• At least one beneficiary must be nominated in the trust deed and the trustees must hold the trust assets for the benefit of the beneficiaries.

• The trustees must not have an interest in the trust property or use the trust property for their own benefit, i.e. there must be a clear separation from the control and enjoyment by the trustees of the trust assets.

Should you wish to transfer several assets into the trust, it is recommended that an accountant/auditor be appointed to undertake annual audits.

2. Tax Saving Haven

Trusts have been used to save on an individuals estate duty liability upon their death. Assets would be transferred to the trust and would not form part of the individuals estate. Currently, when an individual dies estate duty is levied at the rate of 20% of the value of the estate over R3.5 million.

The Davis Tax Committee has however made recommendations in respect of increasing the estate duty abatement, an increase in capital gains tax liability for trusts, taxation on interest-free loans to trusts and removal of donations tax exemptions on donations made to trusts.

​2.1 Estate duty

It has been recommended that the primary abatement on estate duty should be increased from R3.5 million to R15 million as well as estate duty rate being levied 25% in respect of estates exceeding R30 million (as opposed to being levied at 20%). Further to the above, inter-spouse exemptions in respect of donations could possibly be removed, subject to a reasonable maintenance exemption.

2.2 Interest-free Loans

Effective 1 March 2017, Section 7C has been introduced in to the Income Tax Act, affecting interest-free loans within a trust, thus impacting estate planning. A deceased who was the holder of an interest-free loan to a trust may find the loan being included in his/her estate duty since the holder thereof will be ‘deemed to be in effective control of the trust for estate duty purposes’.

2.3 Trust Income

The Minister of Finance proposed a higher marginal tax rate on income above R1.5 million (at 45%) in the 2018 Budget. SARS is now carefully take note of the way in which trusts are structured. Previously, one could distribute trust income amongst beneficiaries, thus keeping this income below the taxable bracket. An interest-free loan account would then be created and the sum would be written off by making use of the R 100 000,00 annual donations exemption. The Davis Tax Committee (in respect of interest-free loans to trusts) have recommended that the holder thereof be subject to annual taxation on any interest paid on the loan account. This affects both the trustees and the beneficiaries who will be taxed in their personal capacities. This loan will further need to be repaid within 3 years, failing which SARS will deem the sum as a donation and subsequently levy donations tax of 20% and the annual exemption of R 100 000,00 cannot be used when donating to a trust.

2.4 Capital Gains Tax (CGT)

The Minister of Finance further proposed the following in respect of CGT :

• Effective Capital Gains Tax rate for individuals and special trusts increased to 18%.

• Effective Capital Gains Tax rate for other trusts increased to 36%.

Sale of a property will attract CGT which will be included in the taxable income of the trusts. Income tax for a trust is a flat 41% and the effective rate of CGT is higher that that for individuals and companies. The law relating to trusts and the decision as to whether to use a trust as a vehicle to hold assets or immovable property is a complex one since trusts are taxed at a higher rate to individuals and are further not entitled to certain rebates to which individuals are entitled. The tax of a trust can be extremely complicated and can depend on various factors such as how the assets are held and the type of trust. While tax savings can be achieved through the proper use of trusts, this is ever changing. Unwillingness by a trustee to relinquish control may the trust assets being included in the trustees personal estate for estate duty purposes. Ownership of trust assets must be given up the trust.

(It is recommended that the reader should always ask his or her attorney or auditor to assist him or her with trusts. The tax implications of trusts needs a much more detailed explanation that his introductory article can provide on the topic.)