SALE OF PROPERTY OWNING COMPANIES / CC’s / TRUSTS

INTRODUCTION

We are often approached for advice around the sale of shares / members interest in companies / close corporations that own immovable property (hereafter referred to as property) and the sale of trusts that own property.

The objective of such transactions is to purchase the company / close corporation or trust that in turn owns property and thereby effectively purchase the property. Pre 2001 this was a popular and cost effective method to purchase property (save for the sale of trusts where the status remains the same).

Reference to the sale of shares in Companies in this article must be taken to include a reference to member’s interest in close corporations.

TRUSTS

It is possible and legal to sell a trust and thereby acquire the property registered in the name of the trust. An agreement is entered into whereby the trustees and beneficiaries of the trust are amended to persons nominated by the purchaser, against the payment of a consideration (in effect the purchase price).

These changes are registered at the Masters office and the consideration is paid. This effectively changes ownership of the trust and the property is “acquired”. These transactions attract the payment of transfer duty to SARS based on the market value of the property. There is thus no real benefit to these transactions from this perspective.

SALE OF SHARES / MEMBERS INTEREST

An agreement for the sale of the shares in a property owning company is entered into, whereby the property is effectively purchased. A specific agreement is to be entered into whereby warranties are given. A standard property sale agreement cannot be used. There are a number of factors to be considered:

TRANSFER DUTY: The Taxation Laws Amendment Act of 2001 provided that there is transfer duty payable on the sale of shares in residential property owning companies. Transfer duty is payable at the standard rate based on the market value of the property. This excludes commercial / agricultural property owning companies. The test here is the zoning of the property (not the use).

CAPITAL GAINS TAX: Since 2001 a further issue to be considered is CGT. Example: A company purchases a property in 2002 for R100 000.00. The shares in the company are sold in 2015 for R500 000.00. The company (at the direction of the purchaser as shareholder) sells the property in 2020 for R1 000 000.00. The company is liable for CGT (maximum effect tax rate is 22.4% of the gain) based on the base cost of the property in the hands of the company as at 2002 (not on the sale price of the shares in 2015), i.e. the gain for the company is R900 000.00 and not R500 000.00. The purchaser (through the company) has thus effectively purchased the CGT liability of the company.

COMPANY LIABILITY: When the shares are purchased, the purchaser as the new owner of the company effectively assumes any liabilities of the company as at the effective date of sale. Prior to 2001, the above factors (transfer duty and CGT) were not applicable and thus the saving in transfer duty was deemed to be sufficient quid pro quo for this assumption of risk. Warranties against the company’s liabilities prior to date of sale were provided by the seller to protect the purchaser.

SECURITIES TRANSFER TAX: This is payable by the purchaser at the rate of 0.25 % of the value of the share sold.

CONCLUSION

In most instances the purchase of a trust / company / close corporation that owns property is not going to be the best method to acquire that property. It is more cost effective and less risky to form a new company / trust and allow the new entity to purchase the property directly from the existing entity.