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The Utilization of the Usufruct Phenomenon when Transferring Fixed Property to a Trust

Contrary to popular belief the Usufruct Phenomonan is not only alive and well but provides Tax saving solutions that can benefit all who implement it in the correct manner.

It happens from time to time that a person has a need to transfer his/her property as a long term asset to a Trust. The reason for this might be for risk management, estate planning etc. In order to effect same on the standard method the transaction will draw transfer duty at a rate of 8% on the purchase price. This on a transfer of a R1 000 000-00 property we end up paying R80 000-00 to the Receiver of Revenue for purposes of transfer duty.

The solution to this problem will be to consider transferring the property to the Trust with the reservation of a Usufruct in favour of the seller.

In this context the Usufruct will refer to a “Right of Occupation” being reserved in favour of the seller.

Example

  • The seller sells his/her property to his/her Trust for R1 000 000-00 retaining a Usufruct for a period of 36 years.
  • The transfer duty payable on this transaction will not be R80 000-00 but R1 352-96.

How is this possible?

The value of the Usufruct is determined as follows:

  • R1 000 000.00 X 8,1924 X 12% = R983 088.00 (Value of the Usufruct).
  • The value of the Usufruct is deducted off the purchase price to determine the “bare dominium”.
  • As the seller retains the value of the Usufruct we only end up paying transfer duty on the “bare dominium” and that is how we obtain the saving.
  • The saving is rather substantial.
  • At the end of the exercise the property is owned by the Trust subject to a Usufruct in the seller’s favour.

The implication of this is that the property cannot be sold or bonded without the Usufruct holder’s consent. It is interesting to note that when you do apply for the bond in the name of your Trust the National Credit Act will not have any bearing on such an application.

The same exercise can be applied where the property is owned by a third party and the property is transferred to the Trust subject to the reservation of a Usufruct in the beneficiaries favour. As transfer duty will be paid on both the value of the Usufruct on a natural scale and on the bare dominium on a legal person scale the Trust will end u paying R25 507-40 in stead of R80 000-00 if the same facts where applied to this transaction.

We need however to caution that due care needs to be taken that the Usufruct is correctly implemented with consideration being given to i.e use of the fixed property, age of the person getting the Usufruct, Capital Gains Tax etc.

Should you require assistance in giving consideration to the above application you will be well advised to contact your Attorney or the writer to assist you in this regard.