Should you hold property in your own name or in a trust?

Article summary

• A trust is a legal entity that holds assets on behalf of its founder.
• A trust is not liable for estate duty, transfer duty, executor’s or conveyancer’s fees.
• There are administration costs involved in a setting up a trust, and it is taxed at the top marginal rate.
• The alternative is to hold property in your own name, in which case it forms part of your estate.

Investing in residential property (and not just your own home) is considered one of the most sensible things you can do with your money. Bricks and mortar are one way of keeping your money safe.

So it’s best to know what options you have available to you. For example, you can hold the property in your own name or in a trust. What’s the difference, and what are the pros and cons of each approach? 

What is a property trust?

A trust is a legal entity that holds assets on behalf of its founder for the benefit of beneficiaries. 

The founder tasks a trustee or trustees with the management of the trust’s assets for the benefit of one or more beneficiaries. 

6 pros of holding property in a trust

1. A trust does not die (called “perpetual succession”) so it is not liable for estate duty, transfer duty, executor’s or conveyancer’s fees, or capital gains tax (CGT) that might otherwise happen on the death of an owner. 
2. Property registered in a trust is protected from creditors because it does not form part of your personal estate.
3. Your trust and the property registered therein will not be affected by your death.  If your heirs are beneficiaries of the trust, it should not be necessary to transfer the property into the name of the heirs.   
4. Income from the trust’s property is for the trust, and expenses such as repairs, maintenance, water and rates bills are also for the trust’s account. 
5. Having property registered in a trust rather than your own name means the value of your personal estate is reduced, which lessens your estate duty exposure. 
6. Even though a trust is taxed at the top marginal rate (45% as per 2022), trustees have the authority to distribute rental profits to beneficiaries to minimise the tax position.  The tax will then be paid at the beneficiaries’ marginal rate.

5 cons of holding property in a trust

1. There are setup and administration costs involved.
2. Problems may occur if the trust is not properly established or managed. The trust will be a separate tax payer, meaning the cost of another tax return.  
3. If you lend money to the trust, you will have to charge interest at the SARS rate.
4. When home loan finance is required, the banks are unlikely to grant a 100% bond to a trust. 
5. When a bank lends to a trust, they are likely to request signed surety or cash security of some kind. If the person who signed surety dies, the banks could submit a claim and subsequently sell the house to settle the outstanding bond if the estate does not have sufficient equity. The balance would be paid to the estate.  If you owned the house personally, a similar situation might arise on your death. You can take mortgage protection insurance.

5 pros of holding property in your own name

1. Because all trusts are taxed at 45%, it can be better to buy an investment property in your own name. Initially, your property investment may make a loss.  You can deduct that loss against your taxable income.
2. Having a property in your own name means that you have an asset personally. That can help you get finance later when the property has been paid down and you have equity in it.   
3. If you hold property in your own name, it forms part of your estate. Your estate can transfer the property to an heir such as your spouse or children without transfer duty (there will still be lawyer’s fees). 
4. If the property is your primary residence, you will get an exemption for capital gains tax up to an amount (R2 million in 2022), which is a benefit that you won’t have in a trust. 
5. When it comes to applying for bond finance, it is possible to qualify for and be awarded a 100% home loan. 

3 cons of holding property in your own name

1. If you’re buying property in your own name there is no asset protection from your creditors.  If you have a business (or have stood surety for your business), you might think of protecting your home in a trust. This is sometimes called “insolvency proofing”. 
2. On your death, you’re subjected to costs and CGT, executor’s fees and estate duty.  What these costs will be will depend very much on your estate and its value at the time of your death.
3. If you’re renting out your property, and you’re in the top income bracket, that rental income will be added to your main income increasing your tax payable. That said, a trust always pay at the top income tax bracket, unless it distributes the profits to a beneficiary. The beneficiary’s income tax bracket will then determine the tax.

Get the best deal on your home loan

Whether purchasing a property for a trust or in your own name, ooba Home Loans can help you secure the best deal by submitting your application to multiple banks, allowing you to compare deals and choose the one with the most favourable interest rates.

We also offer a range of tools that can make the home buying process easier. Start with our Bond Calculator, then use our Bond Indicator to determine what you can afford. Finally, when you’re ready, you can apply for a home loan.