“There is never a wrong time to buy the right home” (Anon)
You find the house of your dreams, agree on the price, and get ready to put pen to paper. The house is in the name of a company, and you are offered a choice – either buy the house out of the company or take over the company (which owns the house and nothing else) by buying the shares and thus avoid the delay and cost of a normal property transfer and registration in the Deeds Office.
What should you do? There are a host of both practical and legal factors to consider before deciding. Holding property in a company can come with significant advantages, but there can also be major disadvantages, so professional advice specific to your own circumstances is a no-brainer here.
Some of the many factors you should consider are –
Transfer duty – you pay it either way!
As a buyer you can never lose sight of all the costs you will incur in buying a house, and the “big one” is normally transfer duty. It is essentially a government tax, payable by you as buyer (unless the property sale is subject to VAT), and it can be a lot of money.
Do not however fall into the old (and surprisingly still-common) trap of thinking that by buying the company you avoid paying transfer duty. That was indeed a commonly used loophole in decades past and it is still sometimes referred to. But in reality, that all changed many years ago, and (subject to what is said below) you should budget to pay transfer duty as set out in this table –
Transfer Duty 1 March 2021 to 28 February 2022
Source: SARS “Budget Tax Guide 2021”
So, for example, if you buy a house for R3m you will pay R146k in transfer duty. Or R916k on a R10m house. Finding a way to avoid or reduce such a cost is an attractive proposition, and indeed until 2002 it was a common way for buyers and sellers to save transfer duty and to instead pay only ¼% “Securities Transfer Tax” – a huge saving.
That loophole closed however many years ago – on 13 December 2002 to be precise – and since then the sale of shares in a “residential property company” (a company with over 50% of its asset value in residential property) attracts transfer duty on the “fair value” of the property. No savings there!
What about “buying” a property-owning trust?
Similarly, before 2002 a common transfer duty avoidance strategy was to hold property in a trust, then to “sell” the trust to a purchaser by substituting him/her as a beneficiary of that trust. That loophole was also closed in respect of beneficiaries holding “contingent interests” in the property – the situation here is a bit more complicated than it is with companies as there are various types of trusts you could be dealing with, so specialist advice is essential.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)