How to own properties tax free

Dear MoneywebTax

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?

Answer:
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.

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Intrest. In the case mentioned above I assume the intrest in the trust wil not be tax deductable? by Neil on November 27 2008, 08:03 Find this comment inappropriate? Report it

Coerts Plans You have obviously been to Coerts seminars all I can say is beware, these are the problems he refuses to address: 1. Trusts are not supposed to run at a loss, you now need to explain your actions(see income tax brouchere for trusts). 2. Despite . .more the Trust deed saying a Trustee may borrow money from a Trust it is against the Trust Property Control Act. 3. If a Trust lends money to a party then it must charge Interest and requires some form of security. 4. You will not be able to claim the interest back for the portion of the money borrowed as it is not an expense occurred in the production of Income. 5.This is a scheme to avoid paying tax and the money you receive will be taxed in your hands. . .less by Woody on November 27 2008, 08:21 Find this comment inappropriate? Report it

Well Done Woody Woody excellent response to the question. I agree that the interest cannot be claimed as a deduction (and I assume that in this scheme the full interest is deducted as the tax cert from the bank will not indicate what the funds were used . .more for.) In addtion it appears in thise scheme that the income from the rental property is not distrubeted, so the income will be taxed at 40% Lastly why the hell would you want to incur interest expenses to save 40% tax??????. Your are spending R 1 to get 40c back from the tax man, So in reality you are getting 40c. I would rather pay off the debt and pay 40c tax and keep 60c for myslef . .less by Oracle on November 27 2008, 09:48 Find this comment inappropriate? Report it

Why don't you just buy in your own name 1) Buy property in your own name. 2) As the property value increases, borrow money on the properties. 3) Spend the money, so you can get an income without paying tax. by Andrew on November 27 2008, 12:57 Find this comment inappropriate? Report it

Bad scheme Borrowing against the inflating value of a residence - known as "the ATM in the bedroom" is one of the factors behind the current global banking crises. The flaw is that one day, (and Murphy's Law states that it will be when it is least . .more convenient) the money will have to be repaid, as the article says . .less by Colin on November 27 2008, 13:41 Find this comment inappropriate? Report it

Borrowing against a bond for non trade expenses Andrew - hate to differ with you. But as the interest incurred on the additional draw down was not incurred in the production of income, but to fund your own personal expenditure, that interest is not allowed as a deduction. And thus should be . .more dissalowed by SARS, (or even claimed) . .less by XXX on November 27 2008, 17:24 Find this comment inappropriate? Report it

Income Tax rates I would like to know the deferent income tax payer percenteges earning from R100 000 to R1 000 000 per annum by Alex Mukwevho on December 29 2008, 06:28 Find this comment inappropriate? Report it

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