One must distinguish between security of title and financial security.
South Africans tend to gloss over our system of registration of title. We take it for granted and assume it is virtually the same the world-over. This is not true. We have one of the best and most secure systems of registration and land ownership in the world. Once you have a signed an unconditional agreement, you are entitled to take transfer and once you take transfer, i.e. have the property registered in your name, you have an unassailable right to the property that protects you against the whole world. In other countries, you can be ‘gazumped’, losing the property to a better offer before registration. In some other countries you need to take out ‘title insurance’ to protect your rights of ownership against the rights of other parties.
Any transaction for the change of beneficial ownership of immovable property, which does not involve the change of the registered owner, constitutes a compromise in your security of Title. The compromise is usually a trade-off of some degree of security or certainty of title against financial security and savings in the form of taxation.
The reason it is a compromise is simple to understand. When you buy the legal entity that owns the property (or take over the trust) you are not taking over the property itself, but rather the rights and obligations of the entity that owns the property. Usually the obligations are straight forward, e.g. a mortgage bond which has to be cancelled on the effective date of transaction.
But what if there are other obligations?
What if the seller has misled you and the company or close corporation has outstanding debts or obligations?
The purchaser’s remedy is limited to a claim against the seller who will have given you certain warranties. But obviously a warranty is only as good as the person who has given it. If your seller is a ‘man of straw’ or has disposed of his assets amongst his family or has left the country, your remedies are limited.
Tax and Financial Savings
There are, however, significant tax and financial savings, which make these transactions appealing: The main ones are:
- Transfer duty
- Legal costs
- Estate duty
- Personal taxation
Transfer duty is simply a tax levied on the transfer of land. It generally constitutes the major portion of the costs of transfer.
Remember, where VAT is payable, i.e. where the seller is registered for VAT, no transfer duty is payable. Where transfer duty is payable, it is the identity of the buyer that determines the amount. The transfer duty is a meaningful sum of money. Where you buy the entity that owns the property, there is no transfer duty on the property. In other words, if it still belongs to the company or close corporation, no transfer duty is payable, although other taxes will be levied. Compared to this, the legal fees in facilitating the selling of the company or close corporation are usually in the range of R7 000 – R10 000, depending on the complexity of the transaction.