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.

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