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COMPANY OWNED PROPERTY: SHOULD YOU BUY THE HOUSE, OR THE SHARES?

Oct 26, 2024

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Embarking on the journey to acquire your dream home is exciting, yet it comes with a multitude of decisions. One such decision arises when the property you’re interested in is owned by a company. The seller might offer you two options: buy the property directly from the company or, if the property is the company’s primary asset, purchase the company’s shares – thereby controlling the property through company ownership. This route may seem attractive as it could bypass the delay and costs associated with a conventional property transfer in the Deeds Registry. But is it the right choice for you?

Before delving into the key considerations of this decision, it’s important to clarify a common misconception: many believe that purchasing property through company shares allows them to avoid paying transfer duty. Since 2002, acquiring shares in a “residential property company”, (a company with over 50% of its asset value in residential property) attracts transfer duty based on the property’s fair market value. Accordingly, whether you purchase the property directly or buy the company’s shares, the transfer duty obligation remains. With that clarified, let’s now turn to some key factors to consider when making this decision.

1. Tax Implications

  • Capital Gains Tax (CGT): Companies are subject to higher CGT rates compared to individuals and therefore when you sell the property in the future, the CGT liability could be substantially more if the property is held within a company. Furthermore, individuals benefit from certain tax exclusions, such as the annual CGT exclusion and the R2 million primary residence CGT exclusion which are not available to companies.
  • Income Tax Rates: The income tax rate for companies differs from that of individuals, potentially affecting the overall tax efficiency of your investment. For individuals, any rental income from the property will form part of their personal income and will be taxed accordingly. For companies, the rental income will be subject to corporate tax and once the company profits are distributed to the shareholders, will be subject to dividends tax.
  • Value-Added Tax (VAT): Depending on the circumstances, a company may be required to charge VAT on the sale of the property as opposed to transfer duty being payable by the purchaser.

2. Joint Ownership Considerations

  • Structured Shared Ownership: If you’re purchasing property with others, a company structure (through its Memorandum of Incorporation (MOI) and shareholders agreement) can clearly define ownership percentages and responsibilities, potentially reducing disputes between co-owners.
  • Flexibility: Transferring shares in a company can be simpler and less costly than formally transferring shares in property between individuals as the normal conveyancing procedures required for a conventional property transfer are not applicable.
  • Asset Protection: Holding property in a company can offer protection against personal creditors due to the company’s separate juristic legal personality.

3. Financial Implications and Administration

  • Financing Challenges: Obtaining a mortgage through a company can be more complex, with stricter lending criteria and potentially higher interest rates. Furthermore, only in limited circumstances may bonds be registered over company property to pay for the acquisition of shares therein. Accordingly, it is much easier to obtain a bond and financing in your personal capacity.
  • Operational Expenses and Regulatory Compliance: Owning a company entails ongoing costs such as accounting and auditing fees coupled with administrative responsibilities to ensure that the company remains actively registered with CIPC.
  • Inherited Liabilities: Purchasing a company’s shares means you inherit all its existing liabilities, known and unknown. This could include debts, legal disputes, or contractual obligations. Extensive due diligence is therefore required to uncover any hidden liabilities, which can be time-consuming and costly.

Conclusion

Deciding whether to buy a property directly or acquire the shares of its owning company is a major decision with lasting consequences. While purchasing shares may seem like a good option, it introduces complexities that require careful evaluation. Consulting legal and financial professionals is essential to understand tax implications, assess liabilities, and to ensure alignment with your goals.

 

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