How to own properties tax free
1) Buy property in a trust. 2) As the property value increases, borrow money on the properties. 3) Distribute these moneys (borrowed) to beneficiaries (trusts and natural persons ) tax free. 4) The money borrowed can not be taxed, so you can get an income without paying tax.
This does not seem correct to me but I've been told by various people that they do it and it's legal. Can you please comment on this?
Where the trustee borrows funds from the bank (or any other lender the loan will not be taxable income in the trust because it is capital in nature.
Where the trust distributes/ vests the loan capital into the beneficiaries in the same tax year, it will remain capital in nature and consequently non-taxable in the beneficiaries' hands.
However, this type of arrangement may result in the bank (or other lender) questioning the trustees' fiduciary responsibility towards the trust. This will be the case where the trust subsequently fails to service the loan due to a lack of funds.
If the trust does not have adequate income to service such a loan, and the trustees have known this to be the case, but, still vested the loan capital in the beneficiaries, they would have breached their fiduciary responsibilities and may be held personally accountant for by the bank.
*Madeleine Schubert is from Shepstone & Wylie's Corporate and Commercial Law Department.