If you’re looking to build a long-term property portfolio, then having properties outside your personal name has a lot of merit.
I would go one step further: if you’re prepared to go through the ‘pain’ of incurring capital gains tax (CGT), transfer duties et cetera, perhaps holding them in companies inside a trust is an option that you should consider.
I strongly recommend that you get professional advice on how this can be structured.
Read: Retirement funds vs property: Which is the better investment?
I will give you a word of caution though: there are trust advisors out there who will come up with complicated, expensive structures involving multiple trusts and companies, which often benefit only one entity – and it’s not you.
There is also the possibility of using a Section 42 ‘asset swap’ to delay CGT.
Again, seek guidance from a trusted, preferably referred, professional. It is a good idea to get your financial advisor involved in this process, as it will form part of your long-term wealth planning.
Personal residential properties are usually best held in your own name so you can take advantage of the R2 million CGT abatement.
For other properties, though, especially if they generate income, companies make more sense.
A professional will be able to advise if it is better to have one company per property (which can have some advantages when transferring ownership) or all in one company.
By having companies within a trust, you can have the benefit of the lower company tax rate but the protections and perpetuity of the trust – which you can structure for your legacy, beneficiaries and overall wealth, of which the properties will only be a part.
Offsetting costs within a company is often simpler, and you get less pushback from South African Revenue Service (Sars) as costs are ring-fenced.
Remember, keep it simple. It will bring down the costs.
In the early days, there is no need for ‘professional’ trustees (another way the trust-pushers like to make some more money out of you).
A good accountant is important – they should be able to understand the full picture – your companies, personal tax and the trust. With this understanding, they will be able to divert tax within the trust using the conduit principle, but only if they are fully aware of all the moving parts.
Read: Property vs a diversified investment portfolio: Let’s talk tax and returns
Owning property as an investment has lost some of its lustre in the last couple of decades, popularised, of course by the book Rich Dad, Poor Dad. Since then, legislation has made it more and more difficult for landlords, especially in the residential property space.
Industrial properties seem to have less hassle but make no mistake: property portfolios do not constitute ‘passive income’.
Diversification is important, as one must mitigate the risk of a property having defaulting tenants. In our asset management, we prefer an asset to not make up more than 5% of the portfolio. This is much more difficult with property, but the principle still applies.
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