It is common that parents in their will bequeath property to their children. Often the parent during his/her lifetime wishes to transfer the property to his/her child without letting the child pay for the property. This constitutes a donation and would attract donations tax. What is donations tax, how much and for who’s account?
Donations tax is tax payable at a flat rate of on the value of property disposed of by a donation.
Lets take the following scenario:
A (the father of B) wishes to transfer a property (with fair market value of R1 000 000.00) to his son B, without expecting any payment for the property, i.e a donation.
Section 59 of the Income Tax act provides that; the person making the donation (Donor) is liable for the tax, but if the donor fails to pay the tax within the set period (by the end of the month following the month during which the donation takes effect) the Donor and Donee are jointly and severally liable for the tax
If we were to take the route of a Donation, A, the Donor would be responsible for 20% on the R1 000 000,00. There is an annual exclusion in terms of Section 56(2) (a) and (b) of the Income Tax Act, 58 of 1962 which provides that individuals can donate a total annual amount of R100 000,00 per annum. And therefor A would be liable for 20% on R900 000,00, which amounts to R180 000.00.
R180 000,00 is not a lot of money, considering the fair market value of the property is R1 000 000.00, but not all of us have that kind of money lying around and not all of us can qualify for a mortgage bond and or personal loan.
I often get the following question: Can I sell my property to my son for less than its fair market value. By using our scenario; Can I sell my property to my son for R20 000,00 even though it is valued at R1 000 000.00?
The answer is no, Section 58 of the Income Tax Act provides that where you dispose of a property and the consideration is in the view of the commissioner of the South African Revenue Service (SARS) not adequate, you will be deemed to have disposed of the property under a donation.
This does not mean that all routes are exhausted, and that you can never give a property to a sibling without paying thousands in donation or any other form of tax.
Using Section 56(2)(a) and (b) to your benefit you can enter into an agreement with your sibling in terms where the amount of R1 000 000,00 is payable over 10 years in payments of R100 000,00. The amount of R100 000,00 will then be donated each year, and because of the exclusion, the Donor will be exempt from any donation tax. It is strongly suggested that you first consult with your accountant/auditor, before following this route.
There are other ways to transfer a property to a sibling, without them having to pay for the property, which does not constitute as a donation. It is highly recommended that you consult your conveyancer, should you wish to do so.