The question is not so much whether a share portfolio should still be held in a trust, but whether a trust is still an appropriate entity to house your share portfolio or any other asset(s) based on your specific circumstances.
In many instances a trust has been an effective estate-planning vehicle to reduce your personal estate, and therefore estate duty, by transferring assets to a trust. It was also an attractive vehicle to peg the value of an asset in a trust, on date of transfer, with all future growth accumulating in the trust outside of your estate, thereby reducing estate duty on any future growth of the asset.
There are also other benefits such as protection of assets from creditors and beneficiaries, ease of administration upon death and estate planning for future generations.
Recent changes to the Income Tax Act however, have important consequences for anyone who transferred assets into a trust and may require some reconsideration.
The Taxation Laws Amendment Act, 2016 introduced section 7C.
Section 7C was promulgated on January 22 2017 and the section is effective from March 1 2017. The section has been introduced to prevent trusts from being used to avoid or reduce estate duty and donations tax.
This section has important consequences for anyone who transferred assets to a trust without being paid for the asset.
It was common practice to sell assets to a trust on an interest-free loan basis, as a result of the trust not having liquidity or because the seller did not want to pay tax on the interest. The loan would then effectively be written off by the annual donations allowance of R100 000 per annum until the trust owned the asset in its entirety. The sale of the asset on this basis avoided both donations and income tax.
Donations tax is calculated at a flat 20% of the value of the asset above your allowable donation of R100 000 per annum payable by the donator.
The South African Revenue Services (Sars) has deemed the practice of not charging interest on such loan accounts equivalent to a donation. As such, lenders are now required to charge interest of at least the repo rate plus 1%, (currently 8%) or else pay donations tax.
Loans of R1 250 000 or less will not attract donations tax, as an 8% interest rate applied to R1 250 000 is equivalent to the annual donations allowance of R100 000. That is assuming you have not donated more than R100 000 in that tax year. Any interest on such loans above R100 000 will attract donations tax at rate of 20% of that value if no transactional payment of the interest to the lender occurs.
This section applies irrespective of when the loan was made, whether it was made prior to, on, or after the effective date is irrelevant. It applies retrospectively to loans made prior to March 1 2017. However the actual donation will be deemed to take place on the last day of any given tax year. Therefore any donations in the 2017/2018 tax year will be deemed to be donated February 28 2018 and any donations tax will be payable March 31 2018.
This does not apply to all trusts and would typically apply to family trusts (discretionary inter vivos trusts) set up during your lifetime.
One should also consider the tax implications for a trust which have increased substantially over the years, taxed at a flat tax rate of 45% for any income earned and an effective 36% capital gains tax (CGT) rate.
Individual rates are substantially more attractive with income taxed according to the individual tax tables and a maximum 18% effective CGT.
It is however worth noting that endowments can offer some relief for the taxation of trusts in terms of income and CGT, as long as the beneficiaries are all natural persons.
Although there are options to counter the consequences of section 7C, there is no standard solution and each client’s circumstances will need to be considered to determine suitability.
It is our view that one should consider all the implications of an existing or new trust structure in light of these tax changes. If a trust was created simply to save taxes, it may not serve that purpose any longer.
Depending on the reasons for establishing a trust and the value it offers, it may be worthwhile considering more cost- and tax-effective alternatives to hold your shares or any other asset(s) in a trust.
I suggest seeking advice from a fiduciary/tax specialist to ensure that all consequences of these tax changes as well as any alterations to any existing trust structures are clearly understood, to determine if your trust is still an effective solution.
Brian Butchart is a CFP® professional and Brenthurst Wealth MD.
If you have a question that you’d like to submit to one of the advisors listed on Moneyweb’s Click-an-Advisor section, please contact email@example.com