Can we use trusts to save for an investment property?

A group is committed to collectively saving R45k per month for a year, to purchase an investment property cash.

A group of 15 people is committed to saving R45 000 per month (R3 000 each) with the aim of buying investment property cash at the end of 12 months. I have read up about trusts. Is it perhaps a structure worth modifying for this purpose?

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The importance of choosing the correct business entity for the right type of investment (before making the investment) cannot be emphasised enough. This decision determines the protection, method of succession (passing the investment onto future generations at death), rights and obligations of ownership (management/decision-making process/administration) and tax treatment that the investor will enjoy or be obligated to by that investment.

Moving assets out of one legal entity into another can trigger donations taxes (at 20%), deemed interest charges (at 8% against outstanding trust loans balances – ITA, Section 7C), capital gains tax (CGT) and transfer duties.

The most important considerations (when deciding on a business entity):

  1. Protection (do I need protection from a financial liability point of view?)
  2. Succession to future generations (who receives this asset if I pass away?)
  3. Investor oversight/involvement needs (management and administration requirements)
  4. Most likely capital growth rate – linear or exponential
  5. How much net income is this investment most likely to make?
  6. Is this a legacy investment and what do I want to achieve (do the beneficiaries need protection from themselves/one another)?
  7. Taxation regime of the entity, bearing in mind that tax regulation changes frequently
  8. Setup and running costs

What could be expected from the 15 investors?

The 15 investors bring a wide range of variables to the fore. The structure will require flexibility in respect of protection, taxability, succession and non-monetary contributions. The chosen entity needs to be robust in decision-making instances to ensure operational efficiency. The selected legal entity/structure will also need to assign the accompanied management and administrative responsibilities to certain investors.

We know that initially investment property could be partly bonded (especially consider further expansion into multiple properties) and individuals might have to sign surety in their personal capacity. An investment property structure is run like a business, with rental income and running costs. Once the mortgages have been paid (interest charges disappear), the business’s taxability can dramatically increase, which requires tax efficiency.

Further considerations – what happens when…

  1. One of the investors can no longer contribute (needing or wanting to sell their investment)?
  2. Some investors are in high tax brackets versus some in low tax brackets?
  3. Investors operate in high-risk environments e.g. entrepreneurs, medical practitioners. 

Companies versus trusts:

  1. Trusts essentially are legal agreements where the ownership rights and obligations of the trust assets are transferred onto the trustees of that trust. The trustees must manage these rights and obligations (accompanying the trust assets/liabilities) as described within the agreement (trust deed) to the benefit of the prescribed beneficiaries. There are various forms of trusts, but generally, for investment/protection purposes, a discretionary inter-vivo trust could be considered. Trusts are mostly more suited for more passive/holding investments (e.g. holding a trading company’s shareholding).
  2. A private company (no more new CCs) is a separate legal entity. The rights and obligations of any company is separated from the legal capacity of its individual shareholders. The company is regulated by its ‘Memorandum of Incorporation’ which describes the rights, duties and responsibilities of shareholders or directors. Shareholders are mostly protected from any legal/financial liability unless they are found to be reckless, fraudulent or negligent. Company structures are hence most suited where investment/business risks/liabilities are high.


The South African Trust Law is not nearly as developed as its Companies Act counterpart. This means that some grievances between investors might end up in court to be resolved, at astronomical costs. This could be especially true for an investment idea with 15 different investors, each with their own personal objectives and circumstances.

A trust is better suited to this structure, in my opinion, as a holding entity for the underlying investment property company’s shares.

It would be very difficult to set up a discretionary inter-vivos trust deed to equally serve 15 different investors’ (and their families’) needs throughout. I would hence recommend that each investor decides individually on placing their portion of the company’s shares in their own trust. This could open some additional flexibility to the structure in respect of decision making, protection, taxability, succession and oversight. Trusts are fantastic investment vehicles, but not for actively-managed businesses, as they are no longer seen as tax efficient….

Company – most natural fit

A company structure for a physical investment property (for me) ticks most boxes in respect of the considerations mentioned above. South Africa’s Companies Act is one of the most advanced and developed of its kind. This act clearly describes most aspects of ownership: rights and obligations, duties (MOI), protection, transfer and administrative management/oversight.

Due to the comprehensiveness of our Companies Act, investment companies are often very effective investment entity structures. Any possible legal disputes can most likely be resolved by a clear interpretation of the Companies Act itself (rather than through court action).

Companies are currently taxed at 28% (Income Tax) against net income and 22.4% from a Capital Gains Tax (CGT) perspective. To distribute the net rental income from the company to investors, one will either need to route via a remuneration payment (taxed in individual capacity for services rendered) or via dividend payments that are currently taxed at 20% on a withholding basis (Dividend Withholding Tax). Effectively, income can hence be paid to investors after an effective income tax payment on net income of 42.4% (28% IT + 20% DWT), compared with trusts’ 45% (CGT 36%).

Dividends paid from one local company to another are exempted and perhaps hold some further tax relief for some of the investors who invest via another investment company.

Costs of the structure/investment

Investment decisions require consideration of costs versus the benefits. The benefits from setting up an investment property company for a physical property investment, in my opinion, outweigh the costs. The cost of setting up a personal holding trust (for holding the investment company’s shares) can be considered individually by each shareholder.

A holding trust (holding property company shares) could however be essential if the investment expands into a multi-property dimension. Moving the shareholding (after start-up) can have unnecessary cost implications [capital gains, deemed interest income tax implications (Section 7C), donations and transfer duties] that could have been avoided upfront.


I think an investment property company has more operational, protection and tax flexibility than a trust in this instance.

Choosing the correct investment vehicle from the outset can be just as important as choosing your investment partners and investment properties carefully.

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