Are buying homes in business entities still beneficial?

Buyers who ask to have properties transferred into entities such as trusts, companies or a close corporations instead of into their own names should be aware that current tax legislation doesn’t promote this.

Tony Clarke, managing director of the Rawson Property Group, says that before 2002 property sold as shares in a holding entity did not attract transfer duties – but that is no longer the case.

Since 2002 it has still been permissible to sell a property through a holding entity but transfer duty is now payable on the transaction at the same rate as on a property sale to individuals. Conveyancing fees will also be roughly the same, although costs such as deeds office search and registration fees won’t be included.

“The diligent scrutiny that SARS traditionally applies to all sale transaction documents will probably result in its picking up – and taxing – any other savings made by using a holding entity,” says Clarke.

“If you do decide to sell through an entity, you should be aware that the trust accountant’s valuation of a property held in a company or close corporation is usually lower than the achievable sale price. Also, the difference between what is paid for shareholders’ loans and the sale price is not deemed by SARS to be ‘for the production of income’, so it’s not tax deductible. However, interest paid on the loans to the company or close corporation is deductible.”

Clarke says it’s important to see that where the property deal is done through an entity, buyers are indemnified against any related claims such as VAT, income tax, PAYE and capital gains tax and is also exonerated from obtaining the municipal rates clearance certificates and paying electricity and utility charges, RSC and CMR levies. These have to be paid by the sellers.

Similarly, says Clarke, body corporate clearances, instalment sale lease agreements and employment contracts, service commitments and other legal claims should have been settled and dealt with before transfer.

“If shareholder members are indebted with these sums and cannot pay, the company or close corporation will be held liable – and it may be possible in such situations to deduct such sums from the sale price.

“Sometimes, the company or close corporation will have signed as surety for other debts. Liability for these sureties will be transferred to the buyer. Great care should, therefore, be taken to see that there are no outstanding surety agreements,” says Clarke.

In certain circumstances it may be prudent to transfer a commercial property through a holding entity – especially if the entity was specifically formed to acquire the property or a quick transfer of the shares is wanted before the registration process at the deeds office, which can take considerable time.

The position regarding the payment of VAT should also be understood, says Clarke. Where both parties are registered for VAT, the buyer would pay this and then be able to claim it back from SARS. If the seller is not registered for VAT, transfer duty must be paid by the buyer and if he is a VAT vendor he can claim from SARS 14 percent of the purchase price in the usual way.

If the property has residential tenants and the seller is a VAT vendor, the transaction will be exempt from VAT. If, however, 50 percent or more of the building is let to commercial tenants, SARS will need to examine the leases before deciding on what VAT is payable.

All in all, says Clarke, it is fairly clear that in most cases it is probably preferable to stick to the conventional transfer processes. The advantages that used to make transferring by holding entities beneficial very seldom now apply.

  Comment on this Article

  Please login to post comments

Post to my facebook wall
Characters remaining

    Latest Property News
    • 17 Nov 2017
      FWJK has announced the launch of its latest residential brand, the Lil’ Apple, which will be launched simultaneously in two developments in Cape Town and Umhlanga totaling 600 apartments. The Lil’ Apple is set to be a brand of FWJK’s New York style apartments which will be rolled out nationally.
    • 17 Nov 2017
      It’s been a tumultuous year on many fronts, with socio-political uncertainty setting the tone for much of South Africa’s economic activity yet despite this and seemingly counter-intuitively, the residential property market has held up well.
    • 17 Nov 2017
      The EAAB (the Estate Agency Affairs Board) recently claimed that around 50,000 illegal estate agents could currently be operating illegally.
    • 16 Nov 2017
      Penthouses are synonymous with New York – characterised by high-rise living that is decidedly luxurious and spacious. While exclusivity comes at a price, you can still create a “penthouse” look and feel in your existing apartment or even the upstairs bedroom of a double storey house with some clever design changes and styling touches.
    • 16 Nov 2017
      The area has long been popular with kite surfers and, with escalating property prices in Cape Town itself, is increasingly in demand with home owners who work in town, but are looking to invest in more affordable properties.
    • 16 Nov 2017
      Cape Town’s popularity as a world-class tourist destination has resulted in a spike in the number of homes available for holiday lets and fuelled investor demand for sectional title units with short term rental potential.
    • 15 Nov 2017
      Sappi, one of South Africa’s oldest global companies and a leading global supplier of sustainable woodfibre products, has moved its global and regional headquarters to a new site on the corner of Oxford and 14th Avenue in Rosebank.
    • 15 Nov 2017
      There’s an old saying in real estate that you should seek to make a profit when you buy, not only when you sell – and a large part of succeeding at that endeavour is buying a home in an area with desirable features that will enhance the resale value of your property.
    Subscribe to the MyProperty Newsletter

    Last Name  
    Email Address  
    Email Frequency
    Share this Page

    For Sale Property
    Rental Property
    More Options
    Connect with us