Your primary residence is where you and your family live all or most of the year. You can only own one primary residence at a time.
SARS states that to qualify as a primary residence,
a residence:
- Must be a structure, including a boat,
caravan, or mobile home, which is used as a place of residence by an
individual.
- An individual or special trust must own an
interest in the residence.
- The individual with interest in the residence, beneficiary of the special trust, or spouse of that person or beneficiary must ordinarily reside in the home and use it mainly for domestic purposes as their ordinary residence.
The pros of owning my primary residence in my name
If you own your home (or own it jointly with your
partner), when you sell it, you enjoy a Capital Gains Tax (CGT) benefit – known
as the primary residence exclusion. SARS gives an abatement on the first R2 million of a capital
gain or loss on disposal of a primary residence. For
example, if the gain is R2,5m, R2m must be disregarded, while R500 000 will
comprise a capital gain.
CGT is a tax levied on profits made from assets purchased at
a lower price and sold at a higher price. In South Africa, the current CGT rate
is 18 percent for individuals.
So, if you own your primary residence in your name, you
will enjoy the primary residence exclusion of R2m.
The cons of owning your primary residence in your name
A property worth R2m today will be worth much more
in 20 years.
Say your home is worth R20m when you die, the estate
duty your estate must pay will far outweigh any CGT benefit.
SARS levies Estate duty in terms of the
Estate Duty Act 1955 on the dutiable amount of a deceased person's estate.
Estate duty taxes the transfer of wealth or assets from the deceased's estate
to the beneficiaries. From March 1, 2018, estate duty is 20% on the dutiable
amount of an estate that does not exceed R30m and at 25% on the dutiable amount
of the estate value exceeding R30m.
So, in this example, the Estate Duty
would be R20m – R3.5m x 20% = R3.3m.
Your estate would also be liable for executors'
remuneration of 3.5% plus VAT of the value of the estate – R700,000 plus VAT.
If a company or trust owns your primary residence,
any growth in the property's value will have no impact on your estate. It will
also be protected from attack by your personal creditors.
If you own your primary residence your executor may
have to sell it to generate enough cash to pay the Estate Duty.
If a company or trust owns the property, it does not form
part of your estate if you are declared insolvent.
Buying property in a company makes sense if a trust owns the shares in the company.
