Capital Gains Tax and Usufruct Declaration

Capital Gains Tax and Usufruct Declaration

• 31 January 2025
• Individuals Tax
• The Tax Faculty Tax Specialist

This article is based on tax law for the year ending 29 February 2025.

Question:

Parents bought a house (R2 million) and registered it in the names of their two daughters. The parents retained usufruct. The property was later sold (R3 million) to generate funds for the parents' care in an old-age home.

How should the capital gains tax be calculated and declared in the daughters’ income tax returns? Does the parent need to declare the usufruct in their income tax? If so, how?

Answer:

1. The Problem / Facts

The property, purchased by the parents for R2 million and registered in the names of their two daughters, was sold for R3 million to fund the parents' care in an old-age home. The key tax considerations are:

• The calculation and declaration of Capital Gains Tax (CGT) on the daughters’ income tax.
• Whether the parents must declare the usufruct as income or a taxable event.

2. Applicable Law

Capital Gains Tax (CGT) – Governed by the Eighth Schedule of the Income Tax Act 58 of 1962, which includes:

• Part II: Determination of a capital gain or loss.
• Parts V & VII: Base cost of the asset (R2 million in this case).
• Part VI: Proceeds of the disposal of an asset (R3 million).

Usufruct – The valuation and tax implications of usufruct are addressed under:

• Paragraph 35(3): Determination of the base cost and its impact on CGT.

3. Application of the Law to the Facts

• Capital Gains Tax on the Daughters

As the legal owners, the daughters are liable for CGT upon sale. The capital gain is determined as follows:

• Sale price: R3 million
• Less base cost: R2 million
• Capital gain: R1 million

If the property was their primary residence, the primary residence exclusion could apply, reducing or eliminating CGT liability. The exclusion would be split equally between the daughters.

• Impact of Usufruct on Parents

The parents, holding a usufruct (a limited real right), generally do not have a direct CGT liability unless the usufruct was ceded or terminated for consideration.

• If the usufruct was formally transferred or ceded, the parents may need to declare its actuarial value as a deemed disposal, based on their age and the property's value at cessation.
• If the usufruct simply expired with no consideration, there is usually no CGT or income tax liability for the parents.

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