| Did you know the manner in which you hold real estate can drastically impact the amount of capital gains tax, income and other tax is paid? Property investors would benefit from understanding the advantages of purchasing investment properties in a discretionary trust (“DT”) also commonly referred to as a family trust, rather than purchasing in their personal name or through a company structure. Property investors are generally deterred from investing in real estate due to high capital gains tax exposure on such investments, relentless land lax attracting these investments and paying income tax at a high rate (generally at the highest marginal tax rate). Lack of asset protection is another concern for the investor – assets held in the investor’s personal name will always be at risk if the investor incurs financial and legal liability. Get the structure right Armed with appropriate legal and tax advice, such property investors can protect their investments and reduce their tax exposure simultaneously by structuring their portfolio via a DT. |
Some key benefits of a DT:
- Asset Protection
The assets are held in the name of the trustee (and not in individual names) acting as a protective shield as between access to the assets and creditors or other legal and financial liability otherwise incurred by the investor.
- Capital Gains tax reduced
Assets held in a DT attract reduced CAPITAL GAINS tax exposure in the same way as if the asset was purchased in the personal name of the investor (namely a 50% reduction of the total gains if passed to a beneficiary). In contrast, a company structure exposes itself to the full capital gain.
- Flexible Internal Succession
All assets held in the trust (including real estate) are held by the trustee (preferably appointing a corporate trustee to enhance estate planning flexibility and perpetuity of the investor) on trust for the benefit of the trust beneficiaries.
This set up ultimately allows for perpetual internal control of an investment property that is managed within family over time without attracting unnecessary taxes, including stamp duty. A win for the investor.
- Minimised Income Tax
If an investment property was owned in the name of an individual, the income derived from that investment would be taxed at that individual’s personal tax rate. If that investment property was held in a DT, the Trustee would be able to distribute the income derived from that investment to a trust beneficiary whose individual personal tax rate is the lowest, thereby exposing the overall investment to significant savings in income tax payable. Another win for the investor!
