THE FINANCIAL WELLNESS COACH
Negotiating the minefield that is estate duty and donations tax
Question: I am moving down to Cape Town to retire and wish to buy a property. The property will not be financed through a bond as I will be using my savings to buy it. My sister recommended that I buy the property in the names of my two children as it will save on estate duty. Is this recommended?
Answer: This is an absolute minefield and you need to consider a number of factors. These include:
- Donations tax
- Estate Duty
- Capital Gains Tax
I would recommend that you have your personal circumstances looked at by an experienced financial planner before you make any decision.
If you buy the new property in the names of your children, this will be considered to be a donation. A donations tax of 20% will be levied on what you paid for the property less your annual R100,000 donation allowance. A straight donation like that, which your sister advised, is seldom recommended.
One way around this is to loan your children the money to buy the house. It is important that you charge an interest rate so that it is not classed as a soft loan. The usual practice is to charge the repo rate plus 1% or 2%. Every year, you are allowed to donate R100,000. This can be used to offset the loan repayments. You can therefore get the same net effect over a period of time without having to pay donations tax.
Estate duty is not as big a deal as most people think it is. You and your spouse get an abatement of R7-million between the two of you. So only once we have passed that threshold will estate duty become an issue in your lives.
Capital Gains Tax
The tax at death that takes most people by surprise is Capital Gains Tax (CGT). Death is deemed to be a capital gain event, so all your assets will have been deemed to have been sold at the date of your death and CGT will have to be paid.
CGT will have to be paid on the house. However, if the house is in your name at the time of death, the first R2-million will not attract CGT. You will only pay CGT on the balance of the gain.
In conclusion, I would recommend that you get someone to do the calculations for you, which compare owning the property in your own name or donating it to the children. You may find that you do a lot of fancy financial footwork for little or no gain.
You also need to be careful when you go down this particular path as your home will be classed as an asset in your children’s estate. Should they predecease you or get divorced, it can cause a lot of unnecessary complications in your life and you could find yourself being financially compromised at a stage in your life when you are financially vulnerable. DM/BM
Kenny Meiring MBA CFP is an independent financial adviser.