I have a property in a trust that I would like to sell. What is the most tax-efficient way to do this and where do I invest the proceeds if I am planning to retire in five to ten years?
When selling a property in a trust, the main tax consequence is Capital Gains Tax (CGT).
A well-established principle in relation to the taxation of trusts is the conduit principle in terms whereof trust capital (or income) that has been vested in beneficiaries is not taxed in the hands of the trust, but rather in the hands of the beneficiaries. Thus with the sale of a property, if the beneficiaries are capital beneficiaries, any capital gain due from the sale of the property may be taxed in the hands of the beneficiaries at their tax rate and not at the tax rate of the trust. It may thus be advantageous to favour beneficiaries with a lower marginal rate.
With reference to the investment part of the question, it is very difficult to provide an answer without understanding the overall assets available to the investor, the level of income required, possible dependents and the current age of the person.
Without the additional information highlighted above, it would only be possible to provide some guidelines to consider.
First, establish the percentage of the overall portfolio the proceeds from the sale of the property would represent. Then understand your own risk profile. When referring to risk profile, you must distinguish between your risk tolerance (which is your personal emotional or psychological willingness to take risk) and your risk capacity (which is your portfolio’s ability to take risk, without jeopardising your financial goals). Hence it is vital to have full sight of the overall asset base before making an investment decision.
The other factor to consider is the required risk – this is the risk associated with the return required to achieve the client’s goals with the available financial resources. The longer the time horizon you have for the investment, the higher the return target can be. Stated differently, a short-term horizon limits the underlying asset allocation to more conservative assets, whereas an investment horizon of five to ten years allows for a higher exposure to growth assets, such as equity and listed property. When considering time horizon, individuals often focus too intently on the retirement date and neglect to consider that actual retirement could last for more than 30 years. This perspective could drastically alter an investment’s time horizon from five to ten years, to 20 to 30 years.
The last three years have been a difficult time in the investment world and both the local and international stock market have underperformed. So one cautionary note I would include, is to be careful to not be too conservative when making an investment decision now. Make sure you base your investment decision on sound fundamentals that are aligned to your financial goals. Further factors to consider are the appropriate investment vehicle/structure and the geographical exposure of the portfolio.
It is strongly advised that a financial planner is consulted, who will ensure that all the elements mentioned above are considered and addressed to implement the most appropriate solution for the investor. The ongoing review of the advice is just as important to make sure the strategy remains relevant in both a changing environment and possibly changing criteria that determined the initial decision i.e. risk profile, return requirement and investment horizon.