We administer Special Trusts, some of which own property. We have occasion to transfer the property into the name of the sole trust beneficiary. Research has led us to conclude that in such an event.) The primary residence exclusion will no longer be appl
Important:
This answer is based on tax law for the tax year ending 28 February 2020.
Answer:
You indicated that the property was owned by a special trust. SARS explains this well in their Guide to the Taxation of Special Trusts. See paragraph 6.4.2:
The primary residence exclusion (paragraphs 44 to 50)
Under paragraph 45(1) a type-A trust that is a discretionary trust must, when determining an aggregate capital gain or aggregate capital loss, disregard –
• so much of a capital gain or loss determined in respect of the disposal of the primary residence of that trust as does not exceed R2 million; or
• a capital gain determined in respect of the disposal of the primary residence of that trust if the proceeds from the disposal of that primary residence do not exceed R2 million.
A “primary residence” is defined in paragraph 44 and for purposes of a type-A trust means a residence –
• in which the special trust holds an interest; and
• in which the beneficiary of the special trust or a spouse of the beneficiary –
ordinarily resides or resided in as that person’s main residence; and
uses or used mainly for domestic purposes.47
The term “an interest” is defined in paragraph 44 and includes –
• a real or statutory right;
• a share owned directly in a share block company or a share or interest in a similar entity which is not a resident; or
• a right of use or occupation.
However, specifically excluded from “an interest” is any right or interest of whatever nature in a trust or an asset of a trust, other than a right of a lessee who is not a connected person in relation to the trust. A beneficiary of a special trust cannot therefore be said to have “an interest” in a residence owned by the special trust. The property owned by a special trust will nevertheless still be regarded as a “primary residence” of a special trust provided the beneficiary or a spouse of the beneficiary uses the property mainly (more than 50%) for domestic (that is, residential) purposes.
A beneficiary who holds an interest in a special trust or an interest in an asset of a special trust will not be able to claim the primary residence exclusion because the exclusion of such a right or an interest from the definition of “an interest” in paragraph 44. Also, a beneficiary who resides in a residence owned by the special trust will not be entitled to claim a primary residence exclusion since it cannot be said that such beneficiary has “an interest” in the residence which is owned by the special trust. The special trust will of course be entitled to claim the exclusion if the other requirements specified in paragraphs 45 to 50 are met since it holds “an interest” in the residence occupied by the beneficiary.
Vesting of a residence in a beneficiary and subsequent disposal to a third party
Once the trustees of a special trust vest an interest in a residence in a beneficiary, the special trust ceases to be the owner of the residence for CGT purposes (that is, ceases to have “an interest” in the residence) and the special trust will be unable to claim the primary residence exclusion.
Should the trustees of a special trust distribute a residence to the beneficiary (that is, the beneficiary acquires a vested right to the residence by virtue of the in specie distribution), the special trust will have disposed of an asset and a potential CGT liability arises. Since the special trust and the beneficiary are “connected persons” in relation to each other, the disposal is deemed to be at market value under paragraph 38. Any capital gain arising in the special trust from the vesting of the residence must be disregarded by the trust and taken into account by the resident beneficiary under paragraph 80(1). Since the relevant capital gain is attributed to the beneficiary before the primary residence exclusion is taken into account, the beneficiary is taxable on the gross amount of the capital gain. The beneficiary may not take the primary residence exclusion into account in determining the aggregate capital gain or aggregate capital loss that arises in consequence of the special trust distributing the residence to the beneficiary because it cannot be said that the beneficiary held “an interest” in the residence as contemplated in paragraph 44 at the time of distribution of the residence to the beneficiary.
Bewind trust
A bewind trust is not the owner of its assets and accordingly does not hold “an interest” in a primary residence and is not entitled to the primary residence exclusion. On the other hand, the beneficiary of a bewind trust retains full ownership of a residence and the residence is, therefore, not an asset “of” a trust. The beneficiary of a bewind trust can, therefore, claim the primary residence exclusion if all the requirements specified in paragraphs 45 to 50 are met.
If it is not a special trust:
According to the definition, in paragraph 44 of the Eighth Schedule to the Income Tax Act, 'an interest' excludes … (ii) a right or interest of whatever nature in a trust or an asset of a trust, other than a right of a lessee who is not a connected person in relation to that trust.
Beneficiaries generally do not have ownership of the trust assets, which vest in the trustees. The primary residence exclusion will therefore not be available in respect of the disposal of the primary residence owned by the trust.
SARS explains it as follows, see the last sentence below, in their CGT guide:
“A beneficiary having a vested right in a property held by a trust will not qualify for the primary residence exclusion, even if he or she resides in the residence, since the vested right comprises an interest in a residence. Although the property may have been vested in the beneficiary, it remains an asset of the trust in which that beneficiary has an interest.”