Use property "breather" for wealth management review

THE cooling off of the residential property market creates an ideal opportunity for a strategic wealth management review – especially for the newly rich that have benefited from the last five year’s of strong economic growth.

The ‘cool-it-and-review-it’ call comes from Barnard Jacob Mellet Private Client Services (BJM PCS), a Rosebank-based wealth manager and consultant to many high net worth individuals.

Alan Botha, Gauteng head of Wealth Management at BJM PCS, says successful residential property investment and share option schemes have driven up the personal wealth of many individuals as both corporate earnings and property values have enjoyed four years of strong growth.

“Some residential property purchases have been speculative in nature,” says Botha. “But in three or four years, your goals and strategy may change quite radically. What was tactical yesterday can become strategic today.

“Recent market reports indicate that residential property is now taking a breather. Beneficiaries of this growth with two or perhaps three properties should take a breather as well, and engage in a strategic review.”

Several key issues faced owners of multiple properties. For example, what goes into a trust and what stays out?

Speculative assets – bought to be traded later for a short-term profit – are not normally placed in trust as trusts usually house long-term core assets.

But a tactical purchase at an advantageous price might have become a family’s treasured second home over a three-year period. Alternatively, its rental income may have become a central element in a portfolio.

By transferring high growth assets to a trust, values can be frozen for estate duty purposes. It might therefore be advisable to sell the asset into a trust and preserve the asset in a tax-efficient manner for the next generation.

Botha adds: “When an asset’s role changes, its treatment within your portfolio should change as well.”

Another issue is that of primary versus secondary homes for purposes of Capital Gains Tax (CGT). A primary residence qualifies for a CGT abatement of R1,5 million in the hands of the individual. Therefore, primary residences are rarely put into a trust.

A coastal property may have been ultimately destined for an individual’s trust portfolio while a Gauteng property may have been regarded as the primary residence. However, four years of wealth accumulation may have accelerated an individual’s retirement plans while large increases in some coastal property values may have elevated the status of the ‘second’ home.

In this instance, the individual may decide to opt for the coastal home as a primary residence and move there permanently while ear-marking the Gauteng home for eventual movement into the family trust.

Botha notes: “We have witnessed such dynamic growth that a breather will not come amiss. When growth potential slows, it makes sense to look at the efficiency of the various elements of a portfolio and what belongs where.

“Professional advice will ensure a strategic view is taken. For example, on the CGT treatment of a residence, an individual can’t arbitrarily bestow primary status on the more valuable property. If you live most of the time in one; that’s the primary domicile not the other property whose value has soared, but is used perhaps six weeks a year.

“Plan properly and you save yourself from surprises such as a SARS ruling that overturns your own view of your tax exposure.”