I’m married out of community of property and would like to donate unit trust investments to my spouse. I’m aware that donations tax is not applicable on donations between spouses. However, will a donation to my spouse by means of transferring units in a unit trust investment trigger a capital gains tax event?
Tax implications of marriage types
As if preparing for the wedding and the idea of marriage is not enough pressure, we are expected to think about estate planning and tax implications of this new union. According to Sars, being married and the type of marriage contract you choose to enter has tax implications. There are 3 types of marriages in South Africa:
- Marriage in community of property,
- Marriage out of community of property (with accrual), and
- Marriage out of community of property (without accrual).
When married in community of property, there is no separation of assets and liabilities between spouses, as they are seen to have equal share of the joint estate. Whilst this is the default contract if a couple does not have an ante-nuptial agreement, it is not the most tax efficient.
On the other hand, in a marriage out of community of property (with or without accrual) each spouse is identified as an independent estate, where assets and liabilities are not merged into a single/joint estate. No, your marriage does not have less love than those in community of property, and it generally has favourable tax implications.
Donations between spouses
A donation, as defined by Sars, is a ‘gratuitous disposal of a property in this case, without expecting something in return’. When an individual donates an asset to another, a flat rate of 20% is levied on the value of the asset/property with an annual exemption of R100 000 per financial year.
By transferring units in a unit trust investment, you are donating an asset to your spouse, however, another exemption is donations between spouses. This is marriage’s unlikely perk. So, you are correct, the transfer of units in your unit trust investment to your spouse will be exempt from donations tax.
Will transferring my investment trigger a capital gains tax event?
Capital gains tax (CGT) was introduced in South Africa with effect from October 1 2001 (referred to as the “valuation date”) and applies to the disposal of an asset on or after that date. In this case, the donation of the unit trust investment is recognised as a disposal of an asset and generally, this would trigger CGT.
With unit trusts (collective investment schemes), you (the unit owner) are liable for the CGT on disposal of units. Placing focus on your transfer to your spouse, you will be exempt from CGT and the Rollover Relief will be in effect. This defers the CGT event to the ultimate disposal of the asset by the receiving spouse. While you may not trigger the CGT event now, the liability of that tax is effectively placed in your spouse’s estate in a future year of assessment.
Knowing how much we don’t want to splurge on a tax bill, Sars is aware that an individual may be tempted to transfer assets to a spouse with a lower marginal tax rate to maximise tax efficiency. Due to that, paragraph 68 of the Eighth Schedule allows Sars to disregard the transfer if the main purpose is to reduce, postpone or avoid paying tax. The asset will be reverted to the original individual.
Speak to a qualified and accredited wealth-manager to assist you with the transfer, ensuring there are no unintended consequences with Sars. This will allow you to make an informed and empowered decision.