Taxation of Trusts

In this third newsletter on Trusts, I want remind you what Mpho’s question was;
“…. I am a business owner and I have a home valued at R5 Mil and I want to ensure that it is protected against creditors in case my business fails and I also want to make sure that the home is not sold when I die but is left for my future grandchildren and great grandchildren….”

One of the most important facts that Mpho must be aware of is how her deceased estate would be taxed when she passes on. Mpho is considering transferring her home [primary residence] to a Trust as a way of protecting her home against a possible attachment should her business fail. She must therefore understand how she will be taxed if she keeps the home in her name as opposed to transferring the home to a Trust

How your deceased estate is taxed if the home [primary residence] is in your private name?

If Mpho does NOT transfer her home to a Trust and keeps it in her private name then when she passes on, she will receive a R2 million Primary Residence rebate. This means that R2 million growth in the capital value of her home will NOT be taxed.

If Mpho bought her home in 2010 at R2Mil and she dies in 2030 and at that time, the value of her home has grown to R6,5 Mil. It means that Mpho’s home’s capital gain is R4,5Mil. She qualifies for the R2Mil primary residence rebate therefore she will only pay Capital Gains Tax on R2,5Mil [R4,5Mil – R2Mil rebate]

How a Trust is taxed
It is important to note that trusts are taxed at an Income Tax  flat rate of 45%. So if Mpho decides to transfer her home into a Trust, the Trust would be taxed at a flat rate of 45% on the income retained in the Trust.

  • A Trust is a legal entity for purposes of Income Tax Act – taxed at 45 %.
  • A Special Trust is taxed at individual income tax tables with all rebates , exemptions and deductions available as for individuals.
  • It has to be registered with SARS as such

Further to the Income Tax payable in the Trust, Capital Gains tax is also payable on any capital Gain – selling of an asset that attracts gain that is of a Capital nature, e.g. Property and shares.  The effective rate on CGT is 36%

Conduit principle
 The Conduit Principle is unique to trusts and allows trustees to distribute income and capital gains to beneficiaries together with the tax payable thereon, in order for the beneficiaries to pay less tax than would have been paid on the same income or capital gains in the trust

I wish to thank Adv Anneke le Roux for her contribution to this newsletter.

DISCLAIMER: Note this is general information. If you are wondering whether you should register a Trust or not, you can contact us to consult and we can also assist you with the drafting and registration of your trust.

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