How can a Usufruct save tax when transferring a property to a Trust?

Transferring your property to a Trust? A Usufruct could solve the headache of Transfer Duty

In the event that a person needs to transfer a property to his or her Trust, the transaction will draw Transfer Duty ? a costly exercise. Because in effect the owner will be selling the property to the Trust.

However, if a Usufruct is implemented this will provide a substantial tax saving solution. SARS will deduct the value of the Usufruct off the purchase price to determine the ?Bare Dominium? value. You only have to pay Transfer Duty on the value of the Bare Dominium.

How a Usufruct works:

The Usufruct grants the ?Right of Occupation? or habitation to a person to make use of a property that belongs to someone else for a limited time period. A typical example is when a person bequeaths his property to his children but grants the right of occupation to his surviving spouse. In the event of his death, his spouse can continue to live in their home and enjoy the benefits for the remainder of her life. Only after her death may the children take occupation of the property or dispose of it.

Usufruct in the case of selling to a Trust

The application of the Usufruct in the case of a Trust is a bit different. Here the owner (seller) of the property can transfer ownership to the Trust but retain the Right of Occupation for a fixed period.

Let?s say you want to transfer your family home to a Trust, as a risk management measure or as part of your estate planning. But you want to continue living in the home or be able to rent it out or enjoy the fruits (e.g. agricultural produce) of the property.

You sell the property to the Trust for R2 million. Since you are only 50 years old and you expect to live to for many more years, you retain a Usufruct for 36 years. Without the Usufruct you could expect to pay R77,000 in Transfer Duty, but the application of the Usufruct will result in zero Transfer Duty.

How is this possible?

Example:

• The seller sells his/her property to his/her Trust for R2 000 000-00 retaining a Usufruct for a period of 36 years.
• The transfer duty payable on this transaction will not be R77 000-00 but R 0.00 (Nil Rand). Please bear in mind that the applicable Conveyancer?s transfer and bond registration costs will still be payable save for the saving on the Transfer Duty.
• SARS formula for the determination the value of the Usufruct is follows: (Value of property) X (factor in terms of Act 45 of 1955) X 12% = Value of the Usufruct
• i.e. R2 000 000.00 X 8,1924 X 12% = R1 966 176.00 (Value of the Usufruct)
• Bare Dominium value =R2 000?000 – R1 966 176.00= R33 824.00

Factors to bear in mind

Be sure to get advice from an experienced property conveyancer for such transactions, as there a many legal factors to bear in mind, such as:

1. The property will be owned by the Trust subject to a Usufruct in the seller?s favour.
2. The seller?s Usufruct will diminish with each passing year until such time as the Usufruct lapses and the Trust becomes owner of the whole property.
3. Once the property has been transferred to the Trust subject to the Usufruct the property cannot be sold or bonded without the Usufruct holder?s written consent.
4. Banks will not consent to the registration of any bond over the property without the Usufruct holder signing a waiver of preference in favour of such Bank.
5. Should a bond application be involved, The Deeds Registries Act 47/1937 does not allow for a Sec 57 Substitution of Debtor with respects to the existing bond. The Trust will therefore have to apply for a new bond.
6. The Usufruct must be correctly implemented with consideration being given to use of the fixed property, age of the proposed the Usufruct holder, Capital Gains Tax, etc.