Legal Articles

The effective rate of capital gains tax has increased dramatically in recent years. It has become more important than ever for taxpayers to reduce their tax bill on immovable property.

Here are some ways to reduce the tax:

1. Hold the property in your own name

If you do so, you pay less than half the tax you would pay if you held shares in a company which in turn owns the property. But if you hold commercial property in your name and you let the property, depending on the amount of rental you generate, you may need to register and account for VAT. Also, you are personally liable for the debts relating to the property.

You could hold the property in a trust which serves as an effective vehicle to hold property from a tax and commercial perspective. However, you should exercise caution when thinking about using trusts as policies regarding taxation could change.

2. Keep accurate records of costs

Put simply CGT is levied on a capital gain release on the disposal of property, that is, on the difference between the proceeds on disposal and the base cost. The base cost is essentially the sum of expenditure incurred to acquire, improve and dispose of the property.

Therefore, it is important to ensure that your base cost is determined correctly. To that end you should diligently store records of every amount incurred in relation to the property, notably the cost of constructing or refurbishing the buildings on the property. Even small amounts add up.

3. Sell shares and claims

If the company sold the property and distributed the net profit to you, your profit will be affected by high CGT rates. However, if you sold the shares and loan in the company, the CGT rate wouldn’t be as high, and so the profit you receive would be higher.

However, the problem lies with an astute buyer being disinclined to buy the shares and loan. First, the purchaser may think that they are taking over a company with skeletons in its closet. Second, the buyer would be taking over the latent CGT and dividends tax relating to the property. If they bought the shares and loan, then the company would still retain its base cost and the buyer would need to account for dividends tax when the company distributes the net gain to them.

One way to induce the buyer to take the shares and loan is to reduce the price in that case you may still pocket a high amount after tax than would have been the case if the buyer bought the property.

Lower costs serve as a benefit to the buyer allowing them to use those funds to pay the latent CGT and dividends tax in future, and possibly have money to spare. Another way to do so is by offering the buyer comprehensive warranties to cater for any hidden liabilities in the company, even placing a part of the price in a trust for a period of time. You could also offer to restructure the property holding using the corporate relief provision so that the buyer could hold the property in a new company with your company having been deregistered or wound up.

Van Deventer & Van Deventer Inc. – Tax Attorneys Sandton, Johannesburg

Van Deventer & Van Deventer Inc. Tax Attorneys offer extensive knowledge and advice in Tax Law. Contact us, for legal assistance.