To entity or not to entity - A guide to property purchases in South Africa - Part 1

Purchasing property is a significant investment, whether for personal use, as a home, or as a business venture. In South Africa, buying property in your name or through an entity, such as a company, trust, or close corporation, carries various legal and financial implications you must comprehend. 

Understanding these nuances can help you make an informed decision while optimising benefits and minimising risks. Hamilton's introduces Part 1 of "To Entity or Not to Entity", our practical guide, which will explore the types of ownership, tax implications, estate planning, and the advantages and disadvantages of owning property through different types of entities.

Types of ownership

In South Africa, property can be purchased by natural persons (individuals) or juristic persons (entities like companies, close corporations, and trusts). Each type of ownership comes with its own set of rules and implications:

- Individuals: Buying property as an individual is straightforward but comes with personal liability risks and potential estate duty upon death.
- Companies: Companies provide a separate legal personality, protecting against personal liability. However, they involve more complex governance and higher capital gains tax rates.
- Close Corporations (CC): These are simpler than companies but provide separate legal personalities. However, no new close corporations can be formed under current law.
- Trusts: Trusts are excellent for estate planning and protecting assets from personal creditors but involve higher capital gains tax rates and formalities.

Tax implications - Transfer Duty and VAT

Understanding transfer duty and VAT is crucial when purchasing property through an entity:

- Transfer Duty

Transfer duty is a tax levied on the acquisition of property and varies based on the property's value (read more about Transfers Duties):

- Up to R1,100,000: 0%
- R1,100,001 to R1,512,500: 3% on the value above R1,100,000
- R1,512,501 to R2,117,500: R12,375 + 6% on the value above R1,512,500
- R2,117,501 to R2,722,500: R48,675 + 8% on the value above R2,117,500
- R2,722,501 to R12,100,000: R97,075 + 11% on the value above R2,722,500
- Above R12,100,000: R1,128,600 + 13% on the value exceeding R12,100,000

- Value Added Tax

If the seller is a VAT vendor and the property is sold as part of their enterprise, VAT applies instead of transfer duty. The selling price is either based on a VAT inclusive or exclusive value. In the event of a VAT exclusive selling price, the purchaser will need to pay an additional 15 % (which exceeds the maximum transfer duty threshold of 13%). However, if the seller and purchaser are VAT registered, and the property is a) of a commercial nature and b) sold as a going concern, the transaction may be zero-rated for VAT, in which case no VAT is payable and no VAT is claimable..

- Capital Gains Tax and Estate Planning

Capital Gains Tax (CGT) applies when you sell a property at a profit. The profit is determined as the selling price less the base cost (initial purchase price) less any improvements. The inclusion rate for CGT varies by the type of entity:

- Individuals and Special Trusts: 18%
- Companies: 21.6%
- Other Trusts: 36%

- Estate Planning

Using an entity like a trust can be advantageous for estate planning. Trusts can help avoid high personal tax rates and estate duties, ensuring that assets are managed and transferred according to your wishes without the complications and costs associated with individual ownership.

Advantages and disadvantages of different entities

- Individuals

The benefits include fewer formalities, a primary residence exemption (R2m) from Capital Gains Tax , and lower CGT rates. However, the disadvantages may include factors such as personal liability for debts, estate duty upon death, and the lack of perpetual succession, which means the property will need to be transferred again in the event of the owner's death. 

- Companies

Advantages include a separate legal personality, protection from personal creditors, and transfer duty rates similar to those for individuals. Disadvantages such as higher Capital Gains Tax (CGT) rates, complex governance and formalities, and a dividend withholding tax on profits must be taken into account.

- Close Corporations (CC)

Advantages include a separate legal personality, informal management, and no audit requirements. However, the disadvantages include higher Capital Gains Tax (CGT) rates, no primary residence exemption, and no new close corporations can be formed under current law, limiting this option to existing close corporations.

- Trusts

Advantages include effective estate planning, avoiding estate duty, and maintaining a separate legal personality. On the other hand, you will be limited by higher Capital Gains Tax (CGT) rates, additional formalities and administrative burdens, and the requirement that the trust must exist at the time of property purchase.

Practical considerations

When deciding on the entity type for property purchase, consider your short-, medium-, and long-term goals, the property's intended use, and your circumstances. The right choice can protect your assets, optimise tax efficiency, and align with your investment strategy.

Please look out for Part 2, where we will go into further detail about property transactions, governance issues, and navigating the complexities of buying property in South Africa.

Read our previous article here

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