WHICH ENTITY TO CHOOSE WHEN BUYING A PROPERTY?
Choosing the entity in which a property is registered may differ according to the needs of the buyer at the time, whether he is starting a property portfolio or whether he is just going to have one or two units as a supplement to his income, for example, would affect whether he goes to the trouble of registering a company or puts it in a natural person’s name, says Nelio Mendes, marketing manager of property company SAProperty.com.
Then, there is too, whether to buy in a trust if the person is planning for his heirs’ futures or wants to keep his spouse protected.
If a person is young and at the starting stages of life, he might just start by buying a property for himself, then choose to use this as leverage to buy a second property with the aim of letting it out, and so on. However, a plan should be established, whether property investment is likely to continue as a business or whether it is a “hobby”, i.e. one or two properties in addition to the primary residence, says Mendes.
If the plan is to have a few properties and grow the portfolio, then it is advisable to register a company and buy the properties in a company’s name. When buying in a company’s name, the costs are higher, however, and there are further costs later if the property is sold.
The company should be registered with the Companies and Intellectual Properties Commission and each year the company must submit annual returns (which are prepared and submitted by an auditor) within 30 days of the anniversary of its inception. While transfer duty is higher on purchase and there are financial fees payable each year, there is more that one can write off to the company, says Mendes.
If the decision is to just have one or two properties, and register them in a natural person’s name, the properties will be liable for Capital Gains Tax. The first R1,5 million is exempt from CGT if it is the owner’s primary residence and if the properties are registered to a natural person there are no auditor or accounting fees payable each year. The problem with this sort of registration is that second and subsequent properties will accrue CGT and on death of the owner, estate duty is payable if the property is registered in a natural person’s name. The benefit of owning a property in a personal capacity is that the income tax paid might be lower (as little as 18%) than the tax paid if the property is owned in a company or trust’s name. In addition to income tax, if property is owned in company name, there will be dividend tax payable.
Trusts are best in estate planning, as there will be no transfer duty in passing the property on to heirs or members of the trust and no auditor reports are necessary each year, but the highest income tax is paid using this vehicle for owning property.
“Careful thought needs to be given to the way in which a property is bought before the offer to purchase is signed, so that there is a proper plan in place and it is not a spur of the moment decision. The cost of running the entity should be justifiable in money recouped from the rental after paying for maintenance or repair to the buildings,” says Mendes.