Buying property through a trust

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A Fin24 user wants to know more about buying property through a trust. He writes:

Can anyone buy a property through a trust? And will it not be better for every buyer to buy a home through a trust and not a home loan?

It will protect everyone, and the families of the trust holder will still be able to stay in the home in the event of the trust holder dying. Also, there will be no more high risk debts.

If a trust holder then buys a property through the trust, a home loan can be taken out if the property needs maintenance or renovation. 

Fiduciary Institute of SA member Keith Cullis of Tax Monitor responds:

Firstly, you are asking a question regarding buying a home in a trust as against in your individual capacity.

Yes you can, and it has its advantages: if an individual dies, then the trust and the house owned by the trust continue.

If the property is in the individual's name, it will form part of his estate and the beneficiaries and executor will decide what must happen to the house based on the deceased’s will, ie should it be sold and the money divided among the heirs or otherwise. 

Any repairs/maintenance or other bills such as water/rates etc will be for the trust’s account.

And since the property is not registered in a person's name, the value of the personal estate upon death is reduced. This would be a reduction in your estate duty exposure.

Also, should  the asset value have increased over time, this growth will be excluded from your estate and the capital gains tax (CGT) payable on the estate is reduced accordingly.

Executor fees pertaining to these assets will also be eliminated. No need to transfer the property from the deceased into the name of his heir. In turn, this saves on unnecessary transfer costs and CGT duty.

Provided that you do not establish your trust(s) with the intention of prejudicing creditors, purchasing or transferring a property into a trust helps to protect the specific asset from creditors.

It is advisable to create and operate a trust with appropriate tax advice. In this way a trust will enable you to mitigate your tax liability with specific reference to income tax, CGT, estate duty, donations tax and transfer duty.

Consider these negatives 

All trusts are taxed at an income tax rate of 40%. It seems to be more favourable to buy a property in your individual capacity rather than in a trust.

Here is why: CGT on the growth of the value of the property comes into play once a property is sold.

Another downside of the trust owning the property is that the founder does not enjoy control over that property, as the trust will be the legal owner of the property and the trustees will have the power to administer it.

The second part of the question refers to a home loan. When a bank lends to a trust and the trust has very little - if any - assets with the exception of the house, then either a signed surety by the purchaser or cash security of some kind will be required.

If the person who signed surety subsequently dies, then the banks will/may put in a claim and if the estate does not have sufficient equity, the bank could sell the house to settle the outstanding bond and the difference will be paid back to the estate.

When finance is required to purchase a property in the current market, the banks are less likely to grant a 100% bond to a trust and demand a deposit of up to 20% when a trust acquires a property.

It appears that in some instances individuals may receive up to 100% property finance.

To summarise: if a person purchases a house in a trust, it is not the structure that will prevent the house from being sold if the person dies, but rather the amount outstanding at the time of his death.

Other structures that are also available have not been dealt with in this response owing to space constraints. 

In conclusion, if administered correctly, you can benefit from purchasing a property in a trust. It is, however, crucial to determine whether the addition of a trust to your portfolio is necessary and beneficial based on your individual needs and circumstances.

 - Fin24

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