There was a time when there were advantages in owning a home through a company. Some estate agents motivated the purchase of a home in a company on the grounds that on a resale, the shares and loan accounts in the company could be sold instead of the property and thereby the obligation to pay transfer duty could be avoided.
The introduction of CGT in 2001 was the first step towards making ownership of a home in a company unattractive. Upon the disposal by a company of a property, the primary rebate of R1 500 000,00 could not be claimed and the rate of income tax payable by a company was higher than the rate payable by a natural person. With STC being payable on the declaration of dividends arising from the disposal by a company of a property, the ownership of a home through a company became less attractive.
A mortal blow was the designation in 2002 of a home-owning company as a "residential property company" which rendered the sale of shares and loan accounts in such a company subject to the payment of transfer duty. A further disincentive will be that in 2010 an annual fee will be required to be paid by companies as the intention is to reduce the number of inactive companies.
At the time of introduction of CGT, an opportunity was afforded by SARS for a shareholder to take transfer from a company of the property comprising the home without the payment of transfer duty or CGT. Many took advantage of the opportunity. Others did not. Those who did not will soon have a second opportunity to extract their homes from residential property companies. The difference this time is that the shareholder will not escape CGT as it will be deferred or rolled over and not avoided. However no transfer duty or STC will be payable.
To qualify, the Taxation Laws Amendment Bill stipulates that the shares in the "domestic residence company" must on the 11th February 2009 have been held directly by a natural person alone or together with the spouse of the natural person. The sole asset of the company must be a residence used exclusively for domestic purposes. The company must make a distribution in specie of the property to the shareholder between the 1st January 2010 and the 31st December 2011 in anticipation of the winding-up or deregistration of the company.
The company will be deemed to have disposed of the property for an amount equal to the base cost of the property on the date of disposal. On the resale of the property by the shareholder, the base cost for the purpose of calculating a capital gain or loss will be the original cost of acquisition of the property by the company plus any expenditure allowable in terms of CGT legislation. However the shareholder will be entitled to the primary rebate which in effect has been increased to R2 000 000.00. As the shareholder will have held the equity in the company, the shareholder's potential liability for estate duty will be unchanged.
This second opportunity afforded by the Government will not apply where the company has more than one shareholder, the company has more than one property or where the shareholder is not a natural person but a legal entity or a family trust. The opportunity will however be available to a close corporation which has one member and which owns a domestic residence.
If the property has been mortgaged to secure a loan, the shareholder will need to discharge the loan or apply for a new loan to be secured by the registration of a mortgage bond against the Title Deeds of the property. The shareholder will incur the cost of registering the mortgage bond in addition to the conveyancing costs pertaining to the transfer of the property. As there will be no purchase price, conveyancers are likely to base the calculation of their fees on the municipal value of the property.
Shareholders of company owned homes should not miss this opportunity and should consult their conveyancers early in the new year.