Rethinking the title of your property...

Back in the infamous Zim dollar days, everyone wanted to put their property into company names. This way, the buyers avoided transfer fees and the sellers avoided paying capital gains tax. There were other reasons too, but these are probably too shady for a reputable agent such as myself to know about...

It now seems that there are more disadvantages to owning a property in a company name than the financial advantages of transfer fee avoidance for your future, potential buyers. I have listed some of the points below, but by no means is the list comprehensive:

1. The myth of not having to pay capital gains tax on the sale of a property owned by a company OR TRUST needs to be debunked as soon as possible. The sale of shares of any description is liable for a 20% capital gains tax. You may be able to find a clever account to perform some creative accounting to avoid the tax, but somewhere down the line these loop holes will be closed and you will be liable for the tax.

2. If you are over 55 years old and the property you are selling is your principal primary residence (your home, in layman's terms!), then you may apply to ZIMRA for Capital Gains Tax exemption. If the property is in your name, then it is much easier to explain to ZIMRA that it is in deed your home and you are eligible for the exemption. If it is in a company name, then there will be all sorts of questions and at the end of the day, you may not get the exemption, as a company can't have a home, because although a company may be a legal entity: it does not need to sleep somewhere!!!!

3. If the owner of the house was to die, the family would not have to pay death duties on the principal primary residence (yes, the home), but only if the property is in the deceased person's name. If it is in a company name, the Master of the High Court will demand his pound of flesh, at the most vulnerable time in the grieving family's life. The last thing you need is trying to find money for the death duties on your home when you have lost a loved one.

4. There is the ever present fear of the 51% indigenisation bill. Personally, I don't see this reaching as far a shelf companies which own houses, but then I am the eternal optimist and this is Zimbabwe, so anything goes, and generally the more unexpected the more likely the event will occur. (What a conundrum that is!)

5. The last point, which comes to mind is the fact that most banks will not loan you money to buy a house in a company name, and so as a buyer you will still have to pay transfer fees to put the property in your name. This whole process thus defeats the reason for the company name and the proposed transfer fee avoidance.  Banks are also reluctant to lend you money against a property in a company name. This is because ownership of the company can be transferred without it affecting the change of ownership on the title deeds.

My advice therefore, is to put your own home in your personal name. If you buy and sell properties as investments then I don't think it matters which way you choose as you will be selling it on. But remember even if you put it in a company name, you will still have to pay tax on the sale of the shares.

Capital Gains Tax and Transfer Fees - Real Case

Last week I gave you advice on costs of buying and selling, so to start the week off, I thought I would give you an example of a recent email I received and the my response to it, as real life cases often have more impact on your understanding than a long list of do's and don't's!!! (Is there even such a word as don't's???) I have removed the name of my client for confidentiality reasons...

Anyway, have a read and if you have any questions or need advice, leave a comment and I will try and answer it for you...

She wrote:

"Hi there Nicky,

Hope you had a good weekend.  Was wondering if I could pick your brain a bit.  My dad has  been offered a house to buy but he's not sure if he trusts the guy very much.  He is saying that he has to pay capital gains tax but he is over 55 years old and has owned the property for about twenty years.  Also would you know who has to pay transfer fees and how much that would be on 130 thousand?  He says his brother in law is an estate agent but like I said he's not sure how trustworthy the whole thing is because of past experience with the same people.

If you have any info that I could give dad that would be awesome.  Thanks so much and have a good day"

I replied:

"On 14 Nov,2011, at 9:20 AM, Nicky Versfeld wrote:

Hi!

Hope you had a good weekend.

Firstly, if the guy is over 55 and the property is not his Principal Home, in other words he has been renting it out, then he will have to pay capital gains tax of 5% on the Purchase Price. If the property is owned by a company then he may have to pay capital gains tax. So your Dad needs to find out who is the legal owner of the property…ask to look at the title deeds. Then find out if he has been living there himself and if all the utility bills are in his name. If he owns it in his personal name, and has been living there then he won't have to pay capital gains tax.

The buyer pays the transfer fees and these are calculated on a sliding scale depending on the price, but usually they come to about 7% of the purchase price.

Where is the property and what does it have? I should be able to give you a guideline value.

My advice also is to pick your lawyer who will do the transfer as a precondition of the sale. I have lots of great lawyers who will be happy to do the transfer and I know they are reputable. Don't allow any money to be transferred to the seller until the title deeds are in your Dad's name and so even if the seller is a bit dodgey, you won't lose anything, just be a bit of a waste of time. You don't pay extra to use your own lawyers as the transfer fees are their charge.

Let me know if I can do anything else to help, and thanks for thinking of me to ask your questions!!!

Have a great week...

Nix                          

"

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Cost of selling your property held in a company or trust

If you read my previous blog about selling your property held in a personal name, then you would realize that there are 2 main areas of cost: The Estate Agent's fees (market appraisals and commission) and the Capital Gains Tax.

With the sale of a property held by a company or trust the Estate Agent's Fees still apply, but the Capital Gains Tax varies and there are accountants' fees and lawyers' fees involved.

Capital Gains Tax is payable on the sale of any shares in a company and the rate is 20%. Some creative accountants may find ways to lower this cost, but it is always best to budget on the most expensive outcome, and be pleasantly surprised in the end if the whole process costs you less. So many sellers have the misconception that there is no Capital Gains Tax due when a property held by a company is sold. They often have been incorrectly advised when they purchased the property and thought that the best, and cheapest way to sell their house in the future would be in a company. Please don't make this mistake!

Properties held by trusts do not incur Capital Gains Tax as in effect no sale has taken place. When you sell your property to the new buyers, you cede your rights to the trust and the Trustees and Beneficiaries change, but the owner of the property remains the same, i.e. The Trust still owns the property. As this transaction does not need to be approved by ZIMRA, the Deeds Office or the Registrar of Companies, it is exempt from Capital Gains Tax. Please note that this is the case at the time of writing, and anything can change in Zimbabwe at any time!!!

Finally, you will have to pay accountants' fees for the change of directors in the company and with a trust you will pay lawyers' fees for the cession documents. These charges vary depending on the lawyer and accountant. It is fairly acceptable to ask the buyer to meet these costs, as with these two types of sale the buyer does not pay transfer fees. However, there are some instances when the fees are split between the buyer and the seller. This is negotiated at the time of acceptance of an offer.

If you have any specific questions regarding the sale of your property, please leave a comment below and I will try and answer it.

Have a great day...