Real Estate Investor Magazine South Africa May/ June 2020 | Page 52

INVESTOR INTELLIGENCE
With a more expensive property with significant capital
gains since the acquisition, the above approach would not
make financial sense, since transfer duties and capital gains
tax become too much. You could, however, consider the
following two methods.
Transferring property to your structure
Steyn Strauss, a director at the Commercial Practice Group
of Phatshoane Henney Attorneys says that an asset-for-
share transaction as defined in terms of section 42 of the
Income Tax Act is often one of the most legal and tax-
efficient ways to restructure a property portfolio.
An asset-for-share transaction makes it possible to
transfer property from your name to a private company
without paying income tax on capital gains or transfer
duties. An asset-for-share transaction allows a person to
transfer properties to a new company in exchange for
shares issued by the company.
The reason why an asset-for-share transaction results
in no capital gains tax for the seller is that the company
acquires the property at its base cost. This base cost of
the property then rolls over to the company, and the
deferred capital gain will only apply if the company sells
the property. This transaction will also be exempt from
transfer duty.
Pursuant to the implementation of the assets for
share transaction it would be prudent for the individual
to consider restructuring his or her personal estate in
order to ultimately hold the share through an inter vivos
trust. This will ensure that all growth which would have
accrued to the individual’s estate had the ordinary shares
in the new company been in their name, only accrues
to the trust. From an estate planning perspective, this
effectively limits and curbs the growth in the individual’s
estate and indirectly reduces the estate duty payable by
the individual in the event of passing as discussed in our
fourth article in this legal series.
Please note, legal, conveyancing, and bond registration
fees (if a new bond is taken out in the company) will apply
with this approach. It is also imperative to seek professional
legal advice to ensure legal and tax efficiency with asset-
for-share transactions.
Using a usufruct to transfer properties to a trust
According to Bert Smith, Director of Bert Smith
Incorporated, the usufruct phenomenon is utilised to
transfer fixed properties from an individual or company
name to a trust as a property restructuring or risk
mitigation tool. The main consideration for the use of the
usufruct phenomenon in this manner is that a property
restructuring exercise can be implemented while securing
a substantial saving on Transfer Duty or VAT as the case
may be.
“The easiest and most
common restructuring
approach is to sell properties
to your structure. The trust
or trust-owned company will
be the purchaser, and the
individual will be the seller.”
Usufruct directly translated means “right to fruits” and
has its origins in Roman Law. In the modern contexts it also
refers to a person’s or a legal entity’s “right to occupy” or
“use” of a property which right is then retained by the Seller
on registration of transfer. The consequence thereof is that
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MAY/JUNE 2020 SA Real Estate Investor Magazine
Transfer Duty or VAT (as the case may be) is not payable
on the full purchase price but only on the Bare Dominium
value (Bare Dominium = Purchase price minus the value
of the Sellers usufruct determined as per SARS formula)
therefore resulting in a significant saving.
Smith noted that the due and proper implementation
of this specific strategy would result in the trust owning
the property subject to a usufruct in the seller’s favour.
The usufruct can be lifelong or for a fixed term which will
inevitably impact the value of the usufruct.
A number of factors will be considered in order to
establish the best outcome:
The seller’s usufruct falling away on his or her
passing (lifelong usufruct) or on date of expiry of
the usufruct (fixed term usufruct).
The trust not being able to sell, bond or burden
the property without the written consent from the
usufruct holder.
Banks will not register a bond on the property
in the trusts name without the usufruct holder
signing a waiver of preference.
The number of permutations are endless and as such
you need to get advice from an experienced and qualified
Legal Practitioner whom can advise you securing the best
intended outcomes. Please note, legal, conveyancing, and
bond registration fees (if the trust takes out a new bond)
will apply with this approach.
Hopefully, this article removed any excuses to keep
your properties in the incorrect investment structure.
Remember, strategy without structure = inefficiency.
SOURCES Prosperity Enterprises, Phatshoane Henney
Attorneys, Bert Smith Incorporated
SA Real Estate Investor Magazine MAY/JUNE 2020
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