We are often asked by clients of the advantages and/or disadvantages of buying a home through a trust as opposed to buying it in your individual capacity.
Let us look at some of the pros’ and cons’
If an individual dies, then the trust and the house owned by the trust continue. If the property is in the individual’s name, it will form part of his estate and the beneficiaries and executor will decide what must happen to the house based on the deceased’s will, ie should it be sold and the money divided among the heirs or otherwise.
Any repairs/maintenance or other bills such as water/rates etc. will be for the trust’s account. Since the property is not registered in a person’s name, the value of the personal estate upon death is reduced. This would be a reduction in your estate duty exposure.
Furthermore, should the asset value have increased over time, this growth will be excluded from your estate and the capital gains tax (CGT) payable on the estate is reduced accordingly.
Executor fees pertaining to these assets will also be eliminated. No need to transfer the property from the deceased into the name of his heir. In turn, this saves on unnecessary transfer costs and CGT duty.
Provided that you do not establish your trust(s) with the intention of prejudicing creditors, purchasing or transferring a property into a trust helps to protect the specific asset from creditors.
It is advisable to create and operate a trust with appropriate tax advice. In this way a trust will enable you to mitigate your tax liability with specific reference to income tax, CGT, estate duty, donations tax and transfer duty.
Some of the negatives to consider, however, would be the following:
All trusts are taxed at an income tax rate of 40%. It thus might seem in certain instances to be more favourable to buy a property in your individual capacity rather than in a trust. The reason is that CGT on the growth of the value of the property comes into play once a property is sold.
Also be aware that when a trust owns the property, the founder does not enjoy control over that property, as the trust will be the legal owner of the property and the trustees will have the power to administer it.
In conclusion, if administered correctly, you can benefit from purchasing a property in a trust. It is, however, crucial to determine whether the addition of a trust to your portfolio is necessary and beneficial based on your individual needs and circumstances.