Know the risks and disadvantages of a trust The above points are motivating factors when assessing whether to use a trust. As you can see, your personal circumstances would have an influence such as, amongst others, whether you are prone to risks of insolvency, whether your personal income tax rate is already high and if there is a history of mental illness in your family. However, it is equally important to address the possible risks and disadvantages of owning property in a trust: 1. Capital gains tax implications. In the event that the property is sold, the capital gains tax percentage is far higher than that which would be charged if the property was owned by you in your personal capacity. It must be noted that exemptions apply to capital gains where the property is utilised as your primary residence and personally owned. In the event that you utilise the property as your primary residence but it is owned by the trust, there are provisions available but the relevant costs involved could prove the exercise impractical. 2. Tax on income earned by the trust. If the property is tenanted, the rental would be considered an income earned by the trust which would be taxed at a rate of 45% no matter how little the rent. Take note of the tax strategies that can be utilised in this regard as highlighted earlier. 3. Obtaining finance. A troublesome disadvantage arises in the event that the trust requires finance in order to purchase the property. Financial institutions would very rarely give 100% mortgages to trusts due to the high-risk nature. The reason is that the procedures are far more complex in the event that there is a default in payment. It is for this reason that banks require the trustees to stand surety for the loan where large deposits are often required. How many trustees would stand surety will depend on the surrounding circumstances such as the existing trust assets, income generation and overall financial standing. However, the requirements will differ from bank to bank but it is more often than not that the banks will require more than fewer trustees to stand surety. With trusts, one cannot prescribe a “one size fits all” guidance approach. It is for this reason that it is encouraged to make use of expert tax consultants or property practitioners who will help you make the right decision taking into account your personal circumstances and goals. Courtesy of Property24
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