Transfer Duty Exemption - Should I Move a Property From a Trust into my Name?

A prospective client posed the following question to me:

“I am in two minds whether to make use of the window period for transferring my primary property, which was bought in a family trust approximately 9 years back, into my own private name? Is it really worth the effort and money re capital gains tax, estate tax, etc..? And will there be a clamp down on the so-called “empty-shell” trusts after the window period has expired? Can you please advise?”

We answer as follows:

You have asked a good question and I don’t believe I can answer it effectively in this forum.  I suggest you seek appropriate legal advice before you make a decision either way.  However, I will try and address some of the issues for you.

There is potentially a big saving.  If your primary residence is sold out of a trust you do not have the advantage of the R1.5 million exemption on the gain afforded to individuals. This is best explained by an example:

Say your primary residence was purchased for R1 million (after October 2001) in a trust and then sold 10 years later for R 3 million.  The gain is R2 million.  The trust will pay an effective rate of 10% on the gain (assuming the gain is distributed to the beneficiaries, who are natural persons), which amounts to R200 000.  If you attend to the transfer out of the trust into your personal name you will have the exemption of R1.5 million available to you when you sell your primary residence.  You will then only pay Capital Gains Tax on R 500 000 (R3 million less R1.5 million). The tax would amount to R 50 000 (effective rate of 10% on the gain) - this amounts to a saving of R150 000.  You will need to pay the transfer costs, which is minimal compared to your saving.

The only other issue you would need to consider is the estate duty problem. Your estate will now be worth R3 million more.  However, every estate has an estate duty abatement of R3.5 million and all bequests to spouses are free of estate duty.  You will need to do the sums to see if there is in fact going to be a saving at the end of the day. There is much more to discuss on this point and I suggest you seek further advice if you wish to take the discussion further.

At the end of the day it all depends for what reason the trust was set up in the first place. It may be that the trust was set up to keep the property in perpetuity or part of a larger estate plan and as such it may not be feasible to do the transfer.  It really depends on your personal circumstances. If this is your situation then I suggest you seek specific legal advice on the matter before making any decisions.

Trusts are valuable tools for large estate plans, corporate structuring and non-profit organisations and I doubt that trusts will ever be done away with.  SARS may encourage “empty trusts” to close down by either granting another moratorium or taxing them more heavily.