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Natural Person vs Legal Entity

Natural Person vs Legal Entity

Natural Person

Legal entity (Trust / CC / Company)

Advantages:

Transfer duty is considerably lower, based on a sliding scale relative to the value of the property.

Primary residence of that person then no CGT is payable on profits of up to R1.5 million

Current legislation the average man in the street is better off registering his home in the name of a natural person

No auditors or accounting offices fees

Advantages:

Trust may provide certain estate planning advantages

Protection against creditors - Asset against claims by business creditors in the event of businesses running into financial difficulty

People with own businesses and people who have large estates may well be worth considering registering your home in the name of a legal entity

TRUST

Trust is an effective estate planning tool.

The assets held in a trust are not subject to estate duty.

Assets are protected from attachment.

Eliminates the complications arising when there are multiple heirs in your estate since the trust remains the owner even after your death.

The trust is a separate legal entity and the trust assets cannot be attached by the creditors of the beneficiaries.

The trust does not need to be audited and is therefore a more cost effective option than a company.

Disadvantages:

R1,5m exemption does not apply to non-residents

R1,5m exemption does not apply to 2nd or further properties

Estate duty payable of death

25% of nett profit remaining (after the R1,5m exemption) is added to the individual’s income and taxed at his marginal rate of income tax – max net CGT of 10%

On death of the individual, estate (incl immovable property) with certain deductions, will be subject to estate duty. Abatement R3.5 million is granted, but remaining value is taxed at 20%.

 

Disadvantages:

Transfer duty payable is calculated at 8% of the purchase price

Not be entitled to the Capital Gains Tax exemption

Transfer duty is now payable even if the purchaser "purchases" the company, CC or trust which owns the property

CGT is levied at an effective rate of 14% on the profit earned (i.e., 50% of the profits are taxed at flat rate of 28%)

Company pays CGT at 66.66% on profit from sale of property, resulting in tax rate of 18.67% of the capital gain.

Trusts attract the highest rate of CGT: 66.66% (incl rate) of all profits gained on sale of trust assets - incl in trust’s taxable income and taxed at the rate of

 40% (statutory rate) = resulting in tax rate of of 26.7% of the capital gain.

STC – Secondary Tax: property being sold is the only asset/greater of assets of the company, a special resolution must be filed with the Registrar of Companies within one month of the sale. Failure to do so renders the transaction voidable. In order for the shareholder to access the profit made by the company or close corporation the company will have to declare a dividend which will attract secondary tax (STC).

Annual financial statements must be submitted

Shares in the company or the membership in a close corporation are assets in an estate and can be attached by creditors in the event of sequestration

TRUST

Trust Highest rate of CGT if profits

50% of the gains are included in the trust’s taxable income and taxed at 40% thereby giving an effective rate of 20%. (maximum net capital gains tax cost of 10% (25% x 40% = 10%).

Income tax is levied at a flat rate of 40% which is more than you would pay as an individual or if the property was held in another entity;

Unlike companies and close corporations the trust must be in existence at the date of signature of the agreement to purchase.