Private trusts used to be one of the best ways of planning for the smooth transfer of, in particular, immovable property from late parents to heirs.
Most wealthy parents used to make use of this vehicle, as an estate planning mechanism and it would legally suppress Capital Gains Tax and Donations & Inheritance Tax on inheritances.
Private trusts are vehicles which are created mainly to house property on behalf of heirs with the main benefit of facilitating smooth and tax-free transfers to heirs.
The recent changes to the Transfer Duty Act and Capital Transfer Tax Act however have snatched away the sparkle that private trusts used to have, especially where immovable property constituted the main assets to devolve from estates to beneficiaries. Transfer Duty is a tax payable when immovable assets are transferred to a purchaser or heir of such property.
On the other hand, Capital Gains Tax is payable on the capital appreciation of taxable assets such as shares and immovable property whilst Donations & Inheritance Tax (or Capital Transfer Tax) is a tax that is levied on donees or heirs when they inherit or receive property for free.
The previous sparkle
Trusts used to allow parents to pay Donations & Inheritance Tax, Capital Gains Tax and Transfer Duty, where applicable, when they moved immovable property from their names to a trust during their lifetime. The property would then be owned by a trust and registered in the name of an appointed trustee, until transfer to the beneficiaries, usually on the passing on of parents.
No tax would arise upon inheritance by heirs, as the subsequent transfer would simply be on paper since the ownership moves to the beneficiaries upon the initial transfer by the parents into the trust. The greatest advantage of private trusts was that the heirs would inherit the property without paying a thebe in taxes. This is where private trusts derived their sparkle from.
On the other hand, if someone did not have a trust, their children would struggle to inherit property after the demise of their parents, mainly due to heavy Donations & Inheritance
Sparkle fades away
The Transfer Duty Act has always exempted the transfer of immovable property to heirs and it never was a headache for heirs. On the other hand, BURS accepts, more as a concession, that there is no Capital Gains Tax on inheritances, which leaves Donations & Inheritance Tax as the sole menace heirs face on inheritances. The Donations & Inheritance Tax bills would sometimes be so heavy such that some heirs would not be able to inherit, especially, immovable property.
The above is no longer the case as the Capital Transfer Tax Act was amended to take away Donations & Inheritance Tax when heirs inherit immovable property, effective March 1, 2020. This therefore means that whether or not there is a trust, heirs taking over immovable property will not suffer Donations & Inheritance Tax, Capital Gains Tax and Transfer Duty. By extension, the amendments make private trusts to lose the mentioned tax sparkle that private trusts previously had.
Even though heirs no longer pay any tax when they inherit immovable property, trusts still suppress Donations and Inheritance Tax in cases where the property being inherited is not immovable property. As an example, if a parent’s main assets consist of livestock, shares or any other movable property, they can still use a private trust to pay the Donations & Inheritance Tax whilst they are alive, a move which makes the heirs not subject to that tax upon inheriting the property.
The amendments to the above-mentioned Tax Acts mean that parents may need to consider other vehicles for estate planning other than trusts, especially if they own immovable property. Wills are now a hassle-free alternative to private trusts.
*Jonathan Hore is a Managing Tax Consultant at Aupracon Tax Specialists and feedback can be relayed to email@example.com or 7181 5836. This article is of a general nature and is not meant to address particular matters of any person