While it may be said that the only certainties in life are death and taxes, the taxman on the rare occasion provides John Public a reprieve as far as taxes are concerned. In 2012 this reprieve comes in the form of the Tax Amendment Act 24 of 2011 which allows a taxpayer to, for a certain period of time, transfer a holiday or second home owned by the taxpayer in a company, trust or close corporation into the name of the individual taxpayer, without the usual tax implications arising from such transfer.
Previously, individuals who owned their primary homes in companies, close corporations and trusts were allowed to transfer property into their own names without paying transfer duty, capital gains tax, dividends tax or secondary tax on companies. In October 2010 this window was broadened to include more transactions in the exemption, but the type of property that could be so transferred was still limited to properties which serve as the ‘primary home’ of the individual taxpayer, thus excluding the traditional holiday homes or second homes of the taxpayer.
The Tax Amendment Act 24 of 2011, promulgated on 10 January 2012, now dispenses with the strict requirement limiting transfers to primary homes only. The amendment now makes it possible to utilize the broadened exemption to also transfer holiday homes and second homes into the name of the individual taxpayer, and this amendment applies retrospectively to all disposals of property after 1 October 2010.
There are a number of requirements which must be met in order to qualify for the exemption:
- The ‘disposal’ of the property into the name of the individual taxpayer must take place between 1 October 2010 and 31 December 2012.
- The property must be disposed of to ‘natural persons’ who are ‘connected persons’ as defined in the Income Tax Act. A connected person in the case of a trust would for example be the beneficiaries of the trust.
- A qualifying residence must have been used mainly for domestic purposes by one or more natural persons since 11 February 2009 to the date of disposal.
- Within six months of the date of disposal specified steps must be taken to terminate the existence of the company or trust holding the residence. This does not mean that the company or trust must be terminated within this period, but merely that the required steps to initiate the process of termination should be taken.
Once a disposal qualifies as an exemption, the company or trust is deemed to have disposed of the interest in a residence at its base cost at the time of the disposal (for capital gains tax purposes). As a result, the company or trust will make neither a capital gain nor a capital loss on the disposal.
Why would anyone wish to do this, you may ask? The most compelling reasons for making use of this window period to transfer a primary, second or holiday home into your own name, are twofold:
- The administrative costs of maintaining a legal entity such as a trust or company active and compliant, especially if the property (the primary, second or holiday home) is the only asset of the entity, may be prohibitive and count in favour of terminating the entity.
- The capital gains tax implications of selling a property out of a legal entity as compared to it being sold by an individual: Firstly, if you sell your primary home from a company or trust, you do not qualify for the R2 million capital gains exemption. Secondly, if an individual instead of an entity sells a property, the individual will save at least 50% on capital gains tax. Accordingly, the softening of capital gains tax implications on the later sale of the property, may weigh heavily in favour of using the exemption now to transfer the property into your own name.
Of course when evaluating whether to make use of the exemption, estate planning as well as the intention behind the initial transfer or purchase of the property into the legal entity must be considered against the abovementioned benefits. Accordingly, when considering the use of the exemption, obtain the advice of an estate planner or tax practitioner on the possible pro’s and con’s for you of transferring your primary, second or holiday home into your own name.