Business: Trusts the Answer for Buy-To-Let Investors
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So says Dr Koos du Toit, CEO of P3 Investment Group, a company focused on empowering South Africans from all walks of life to achieve financial freedom through the “buy-to-let” model of property investment.
“Yet with residential property prices under pressure and interest rates lower than they have been in years, there’s never been a better time to purchase buy-to-let units. Once paid off, the rental annuity income that the investor will receive in perpetuity will provide the financial freedom we all aspire to,” he adds.
Du Toit acknowledges that it is more difficult now than it was prior to start of the current financial crisis to obtain mortgage finance. However, there are steps a financially prudent individual can take to increase his or her prospect of obtaining multiple mortgage loans.
“One of these is to establish a trust and have the trust purchase the properties,” he says.
A trust is a legal entity that that is set up to manage assets – buy-to-let property assets, for example - on behalf of its trustees. While the trustees don’t directly own the assets (because they “belong” to the trust), as a beneficiary of the trust the trustee can enjoy all the benefits accruing from those assets, including the rental income.
“Many people recognise the benefits trusts offer in terms of asset protection and taxation, particularly estate duty. However, there are other benefits too – particularly for buy-to-let investors,” he says.
One of the most important of these is the fact that the nature of trusts makes it easier for trusts to obtain multiple bonds.
A trust will be granted additional bonds based on all the trustees’ income, and not necessarily be at a disadvantage because they already have bonds in their names.
A second important aspect is that trusts are not subject to the National Credit Act (NCA). This means that an application for a bond by a trust is treated differently to that of a natural person and is therefore more likely to be successful.
“The asset protection benefit of a trust is also important for buy-to-let investors. The assets in a trust – the buy-to-let properties for example - legally ‘belong’ to the trust and not to an individual. If you (in your individual capacity) get into any kind of financial difficulties, the assets in the trust are safe, provided certain legal limitations have been met,” he explains.
In addition, the trust’s assets are not included in your estate to be taxed when you die. Instead, your spouse, children and their children – if they are the beneficiaries of the trust – simply carry on benefiting from the trust’s assets. A trust, unlike a person, doesn’t die.
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