When growing a property portfolio, the structure of your assets will directly impact your wealth, the legacy you leave behind, and your tax efficiency. At IGrow, we know that structuring your portfolio appropriately ensures financial security and allows you to create generational wealth. Whether you are a beginner investor or a seasoned investor expanding your property portfolio, it is worthwhile to consider a trust or company structure for your assets rather than personal ownership.
To begin with, many investors buy their properties in their personal capacity, without prior knowledge of the risks and tax burdens that are associated with this. Jacques Fouché, founder and CEO of IGrow Wealth Investments, explains in his eBook how savvy investors are making use of trusts, companies, or a hybrid version of both, for proper asset protection and tax efficiency.
Why owning property under your personal name and capacity might be risky
According to Jacques, many property investors are still purchasing property in their personal capacity. In so doing, they are putting themselves as well as their families at financial risk.
Some of the key issues of buying property in your own name include:
- You are exposed to creditors: your personal assets can be seized in times of financial turmoil to settle your debt.
- You are privy to higher taxes: rental income is only taxed at a marginal rate, which could push you into a higher tax bracket where the tax you owe is greater.
- There are estate costs when you pass away: your family that is left behind can face up to 42% in estate-related costs. This includes capital gains tax, estate duty, plus executor’s fees.
- The inheritance you leave to your heirs can be delayed: estates can potentially take up to 2 years to wrap up. This delays access to inheritance funds for your beneficiaries, while potential costs add up.
The perks associated with setting up a trust
Creating a trust to contain your property assets is a flexible way to protect your assets and you will still have control over them. The IGrow Wealth Trust team are ready to help you decide on the best way forward.
If set up well, a trust:
- Allots income to your beneficiaries, taxed at their own (often lower) personal rates. E.g. your children can receive allowances from the trust to pay for school or university fees, and living expenses.
- Will avoid estate costs. This is because assets held in trust are not deemed part of your personal estate.
- Gives full control of asset management through a tailored trust deed and executors.
- Assets are protected from creditors.
- This means tax splitting can take place via income distribution.
Jacques Fouché explains that the ‘conduit pipe principle’ means the trust income and capital will be passed directly to the deceased property owners’ beneficiaries. The first portion (R75,000) is not taxed, while additional income is taxed as per the beneficiary’s personal tax rate. This can work out to be much better than the 45% maximum tax rate directed at individuals or trusts that hold an income.
“Trusts are widely used in estate planning in South Africa, ranging from protecting assets held for the benefit of individuals who aren’t able to manage the assets themselves – through to assisting high-net worth individuals in implementing estate and succession planning, and wealth preservation strategies. One of the main advantages of Trusts is their flexibility and the ability to tailor them to meet your very specific and unique circumstances.” (Source)
View a blog post where we discuss the benefits of a trust setup: Why Trusts are Essential for Property Investors.
Why should you consider setting up a company for your property assets?
There are also notable benefits when you invest through a company structure:
- There is a flat corporate tax rate of 27%. This is lower than the maximum personal tax rate or trust tax rate.
- Beneficiaries can draw a company salary.
- Property assets are protected from personal liabilities.
- This offers a simple hierarchical structure (one director is required in this case).
- There are Improved funding options and companies are looked on favoruably when dealing with a financial lender.
Companies work very well in the case of income-generating properties. The rental income will be taxed at the known flat corporate rate and does not affect your personal tax burden. IGrow Wealth Tax & Accounting Advisory are experts at company setup and management guidance.
IGrow recommends a hybrid approach: a combination of a Trust and a Company
“IGrow advises its clients to purchase properties through a company where they serve as the director. The company’s shares should be held within a trust, ensuring long-term asset protection and tax benefits.” -Jolandi Vermeulen (FPSA®, LLB (UP)- IGrow Trust Attorney
Why choose this hybrid structure
1. Tax Structure
- If you buy a property in your personal name, rental income is taxed at your marginal rate (which can be up to 45%).
- A company pays a flat 27% tax rate, making it a more tax-efficient option.
- A trust, taxed at 45%, should not directly own property but play a crucial role in asset protection.
2. Protection from personal creditors
- Properties or company shares held in your personal name can be seized by creditors if you face financial difficulties.
- By placing company shares within a trust, your assets are safeguarded, as they are no longer part of your personal finances.
3. Estate planning and cost savings
Assets owned in your personal name are subject to:
- Executor’s fees (4.025%)
- Estate duty (20% on assets above R3.5 million)
- Capital gains tax (13–18%)
If a trust owns the company shares, these costs do not apply, ensuring your assets can pass seamlessly to future generations.
The hybrid trust and company Setup: how IGrow supports this structure
The IGrow team offers a full range of services to help our investors structure their property portfolios in the best manner, right from the start.
Through our IGrow Trusts specialist team, we help with:
- Drafting of trust documentation as well as registering new trusts and companies.
- Transferring your company shares to a trust.
- Providing you with independent trustee services.
- Drafting legally and tax-compliant trust deeds and a Will.
- Adjusting existing trust setups for better compliance and benefits.
Our dedicated IGrow trust specialist team makes sure your property investment journey is sound, legally and on a tax level. It will also be aligned with your long-term vision with our property investment specialists from IGrow wealth.
Final Thoughts
Selecting the optimal structure for your property investment portfolio requires more than just legal considerations. It requires a sound strategy and a structured plan to build your legacy. With expert insights and support from the IGrow Trusts’ specialist team, you will be able to grow your wealth with confidence.
Contact our trust specialist team today to fine-tune the most appropriate structure for your property assets so they remain safe and secure in your lifetime and for the generations that follow you.
You can also attend our weekly online Tax and Trusts webinar, run by Jolandie Vermeulen (IGrow Trusts) and Cara Prins (IGrow Accounting and Tax Advisory).
