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11 Feb 2015

BUYING A PROPERTY IN A TRUST OR INDIVIDUAL'S NAME

Today's email came at a time the Mr and myself were looking at our options regarding our small portfolio. We have been busy researching whether buying a property in a trust or individual's name or even a company would be more beneficial for us. At the end we were at the "it depends" position. There is never a one size fits all. My understanding is that, when we have a bigger development, we will definitely buy and sell the land/ properties using a company. But for now, our individual names and a trust will do. Our reader has interesting question in this regard:
Thank you so much for this blog. My passion has been restored. And after what I have gone through in my life, I now know what I will be working for. I am currently unemployed because I am using a spousal permit which does not allow me to work.
I have a few questions for you.
Are all the properties you have under your name or how do you do it?
Is there a limit as to the number of properties you can register in your name in South Africa?
Regards,
SG
Pleasure SG. I am glad that this little blog is helping people to dream and work on their passions. I have never heard of a limit in the number of properties one can buy in their own name in South Africa. I cannot imagine a reason why there would be such a restriction.

Buying a Property in a Company's Name
I actually do not know of any advantages in buying a property in a company's name when one is a long term investor or lives in that particular property. The company pays all the taxes and costs that an individual property owner is liable to pay. This is usually at different times but everyone does pay. In some instances, companies may pay more in capital gains taxes. Buying through one's company or trading trust would make perfect sense for property developers who sell large stocks at a time and property flippers who are constantly having properties on the market.

Buying a Property in a Trust
When it comes to making a choice between buying a property in a trust or individual's name, most property investors choose to buy their investment properties through family trusts. There are a lot more  arguments for trusts compared to those against them. The biggest issue is it being less complex to deal with by beneficiaries in the case of the founder's death. That is unlike the case where one is dealing with an individual's estate which attracts extra costs like estate duties and other fees and taxes. Trusts, not being individuals and being independent of their founders are not liable for the estate duty taxes. The trust does seem to offer a smoother transition in cases of death. I have heard a lot of South Africans arguing about the trust protecting one's personal assets from creditors in the cases of the investments turning sour and therefore offering protection against insolvency.

Having said all that, one has to bear in mind that trusts generally pay high taxes. the last time I checked, income tax for trusts was at a rate of 40 percent. The organisation of the trust is another factor as the trust has to be in the administration of all trustees and not just an individual investor. When one registers a trust, they give control and decision making over to the trustees. A founder cannot just take investment decisions alone. Another factor would be that, a trust may in some instances pay more than what an individual is required to in capital gains tax.

My advise to anyone who does not know what option to go with is that... Do your homework. A trust that is not properly administered and run can lead to a disaster. One's beneficiary may end up losing at the end. If one chooses a trust, it has to be run as a trust and never a company. Trustees have to be properly involved in decision making. 

A trust with some cash should do better than the one that still needs to borrow from the mortgage lenders to acquire assets. Banks can be skeptical to lend to a trust or require a larger equity/ deposit compared to what they would require from the natural person. Legal and maybe financial advise could help. 

Note:
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