There is a window period to transfer your home from a company or trust into your own name without paying tax - but don't miss the deadline, because there is unlikely to be another chance.
You may remember that when capital gains tax (CGT) was introduced, the law allowed a residential property to be transferred tax-free from a company, close corporation or trust to its individual shareholder or beneficiary.
The period provided for individuals to make this change was a year (a further six months were given to effect the registration at the Deeds Office). Many people did not manage to make the transfer by the deadline.
The advantages of holding a home in a company, close corporation (hereafter referred to collectively as a "company") or trust have long passed. Transfer duty is now payable regardless of whether you sell the property directly, or sell the shares or beneficial rights in a trust to a purchaser.
There are now only disadvantages: if your company or trust sells your home, or if you sell your company or the beneficial rights in your trust, you will not be able to take advantage of the tax-free portion of the gain that is available to those who own their homes in their own names.
Thus, many people would love to take the property out of the company or trust. This would also remove the burden of having to produce accounts for the company or trust and submit a tax return each year.
However, the costs of transferring the property into your own name are high. Not only would legal costs be payable to an attorney, but CGT would be payable on the growth of the value of the property since October 2001. In addition, transfer duty would be payable.
Following an announcement by the then Minister of Finance, Trevor Manuel, in his 2009 Budget speech, a solution is in sight. The proposed tax laws, issued as a final draft in September, provide you once more with an opportunity to move your home out of the company you own or out of a trust into your own name without any tax costs.
The reason originally given for this opportunity was that when the new Companies Act becomes effective, all companies will have to pay an annual fee, and it should not be necessary for this fee to be paid where the only purpose of the company is to hold its owner's home. A simpler solution might have been to exempt such companies from the annual fee. But let's not look a gift horse in the mouth. After representations were made to the lawmakers, the concession has been extended to trusts as well.
So what will you have to do?
According to the draft legislation, you will need to see if your company or trust qualifies for the benefit.
In order for a company to do so, 100 percent of the company must be owned by you, or by you and your spouse jointly, and the company must have been so owned from February 11 this year to the date the property is transferred into your own name, or your own and your spouse's joint names.
In the case of a trust, you must have disposed of the home to the trust through a donation, settlement or other disposition (in other words, at reduced value), or have financed the expenditure incurred by the trust to buy and improve the home.
You and your spouse must have ordinarily resided in the property and used it mainly for domestic purposes from February 11, 2009 to the date on which the property is registered as having been transferred to you in the deeds registry, which must take place before December 31, 2011.
Thus, you have just over a year left to complete the process.
The concession applies to properties that constitute a home and the land on which it stands, to the extent that the land does not exceed two hectares and provided that the land is also used as part of the residence.
The effect of transferring your home into your own name during this period is that neither you nor the company will pay any tax or transfer duty, and you will "step into the shoes" of the company or trust as far as ownership of the home is concerned. In other words, the home's base cost for CGT purposes will be the base cost that the company had (be it based on a valuation on October 1, 2001 or determined with reference to the original purchase price and date of acquisition by the company), and there will be no recoupments. As a consequence, the only costs will be legal costs.
My advice: don't miss this chance. I doubt there will be another one.
- Deborah Tickle is a partner at KPMG.
This article was first published in Personal Finance magazine, 4th Quarter 2009. See what's in our latest issue