The final version of the new tax break legislation for homeowners has come into effect.

What's it all about?
If you hold your home in the name of a company, close corporation or trust, you may be one of the lucky ones who can now take advantage of the opportunity to transfer it - free of tax - into your own name.

Why would I do that?
There is potentially a huge Capital Gains tax advantage to holding your primary residence in your personal name (or indeed in the name of any other qualifying individual).

Firstly, when you come to sell the property down the line, you will pay substantially less Capital Gains Tax as an individual, in three respects: -
1. The first R1.5m of the capital gain on a "primary residence" is exempted from Capital Gains tax (a full exemption applies to properties sold for up to R2m), and
2. The balance of the capital gain will be subject to CGT at a maximum effective rate of only 10% (much less than the fixed 14% for a company/CC, or the 20% for a trust), and
3. An "annual exclusion" of R17.500 (R120.000 on death) applies (i.e. any capital gain up to that amount is tax-free for individuals).
Then (and this again is a cost which the private individual avoids), if you want to take the proceeds out of your company or CC, you must also pay a second tax - STC ("secondary tax on companies").

How much tax could I save?
To illustrate - if you bought your house for R1m and in the future sell it for R3m (i.e. a R2m capital gain) -
• An individual (or special trust) will pay (at most - it could be much less if your marginal tax rate is low) R50.000 CGT,
• A company or CC will pay up to R426.363 (a flat R280,000 for CGT plus R156.363 for STC),
• A trust will pay R400.000 CGT. (Note that you may be able to reduce this by having the proceeds taxed in the hands of the beneficiaries. Also in some cases, estate-planning considerations make retention of the property in the trust the better option - take full advice in doubt, as new estate duty deductions come into effect next year).

Do I qualify?
Unfortunately, not everyone stands to benefit. The qualifiers for tax-free transfers, and the parameters for CGT relief thereafter, are not as simple as some media reports have suggested, and you should take advice on your specific circumstances. This list of factors is not exhaustive, but it will give you an idea of where you stand: -
• The property must have been owned by the company, CC or trust since 11 February 2009, and must be -
o Used mainly for "domestic purposes" (the word "mainly" implies that you may be able to safely run a home office, or rent out a room to a soccer fan next year; but there are grey areas here, so take advice before you do so),
o The "ordinary residence" (since 11 February 2009) of you or your spouse; so, for example, buy-to-let properties and holiday houses will not qualify,
o No more than 2 hectares in extent.

• With a company or CC, the shares or member's interests must be held by individuals (so if the shareholder is a trust, there is no relief).
• With a trust, the person taking transfer must have donated the house to the trust or funded its acquisition, improvement, maintenance, and payment of bond instalments (if any).

What if the property is bonded?
If the property is bonded, first check the following with your bank (and factor in whatever costs may result - although they are likely to be nominal in relation to the potential tax saving): -
• Although in theory your bank could possibly agree to substitute you for your entity, it seems more likely that it will instead insist on registration of an entirely new bond - find out which will apply in your case. In any event, now is the perfect time to take out an increased bond if you would like to do so.
• Will it re-assess your loan? If so, will you qualify (as you will have to) in terms of the National Credit Act?
• Will you get the same interest rate as applies now?
• Do you need to give notice on the bond? Often penalties kick in if you give less than 3 months' notice.

Anything else?
If you originally put your property into a separate entity to insulate it from business or other risks (usually protection from creditors), re-assess the current risk in relation to both these tax and other savings. Most importantly, take full advice in doubt!

Although you have until the end of 2011 to effect transfer, procrastination could find you inadvertently disqualifying yourself from taking advantage of this opportunity, and/or leaving it too late, not to mention the immediate saving of the audit and administration costs that go with running an artificial entity.

Be aware also that transfer could be delayed by factors such as SARS' assessment procedures, by the 3-month's notice to your bondholder and approval of a new bond (if applicable), and by the need to obtain rates clearance certificates.

Deadlines come and go quickly - take legal advice on this now!

Acknowledgement: “This article originally appeared in LawDotNews and is reproduced with the permission of Thomson Wilks Inc and DotNews”.