When the house goes, the spouse goes!

The Capital Gains Tax Primary Residence Exemption debate centres around whether the exemption is really beneficial or whether it is a red herring offered by SARS.

The real issue is actually whether the primary residence should be held in an individual's name to achieve the capital gains tax (CGT) benefits in the short term, if the property is sold, or whether the property should be acquired in a trust to ensure asset protection and holistic estate and tax planning.

Understanding the exemption

If a natural person disposes of his or her primary residence and the value of the property does not exceed R2 million, no CGT applies. If an individual sells the primary residence and the value of the property exceeds R2 million, the first R1.5 million gain is exempt from CGT. This exemption does not apply to trusts, close corporations or companies.

However, it is crucial that this information is placed in context. Whilst the maximum exemption is capped at R1.5 million, the actual maximum capital gains tax saving is only R150 000.

Weighing up all factors

The potential capital gains tax saving of R150 000 must be weighed up against numerous other factors, often overlooked in the pursuit of tax savings. The glaring oversights pertain to asset protection, estate duty, CGT in excess of the exemption payable on death, executor's fees, loss of continuity, the possible forced sale of the property on death - all in favour of a possible saving of R150 000. Asset protection is always a key factor to consider and to protect the asset, it should be held in a trust. This would entail the loss of the exemption, but are you prepared to lose your home to a creditor for a possible saving of R150 000? Consider that carefully - as the old adage goes, when the house goes, the spouse goes.

Certain of selling?

Remember, too, that the exemption only applies if the property is disposed of. You might sell the property some day. However, what is far more certain is that you will die. On the event of your death, the property could be subjected to estate duty at 20%, CGT at 10% on gains in excess of the exemption and a hefty executor's fee, levied on the gross value of the property.

A simple analysis on the projected value of the property will show that just the executor's fees will ordinarily exceed the exemption benefit.

Tax efficient

The commonly held misperception that trusts are not tax efficient are based on the argument that capital gains in a trust will attract CGT at 20%, with no exemption. However, if the gains are distributed to a beneficiary of the trust, the beneficiary will achieve the same tax rate as any individual, barring the exemption. If the capital gains are split amongst a number of beneficiaries, even better rates can be achieved. So, a trust could end up being the most tax efficient vehicle, even without the exemption.