When a property is registered in the name of a company rather than in an individual's name, the sale of that property is often structured as a sale of shares in the company. Instead of transferring the property itself, the buyer acquires the shares of the company that owns the property. This structure can have significant implications for tax, VAT, transfer duty and capital gains tax (CGT).
1. How a Sale of Shares works
- The property remains registered in the name of the company.
- The buyer purchases the shares (and often the shareholder loan account) from the seller.
- Because the company remains the owner of the property, no property transfer takes place in the Deeds Office.
- The buyer effectively steps into the shoes of the shareholder and controls the company that owns the property.
2. Transfer Duty vs. VAT
- Normally, when immovable property is transferred between individuals or entities, the buyer must pay transfer duty (unless VAT applies).
- However, when a property is held in a company and the shares of that company are sold, the transaction is not free from transfer duty.
SARS treats the sale of shares in a "property-rich" company as a transfer of property itself.
- A company is "property-rich" if more than 50% of its asset value consists of immovable property in South Africa.
- In such cases, the buyer must pay transfer duty, at the same rate as if the property were bought directly.
Key takeaway: Buying shares in a property-owning company does not avoid transfer duty.
3. VAT Considerations
- The sale of shares itself is not subject to VAT.
- If the company is VAT-registered and the property forms part of a VAT enterprise, for instance – commercial rental, then VAT would only become relevant if the company itself later sells the property.
4. Capital Gains Tax (CGT)
- For the seller, disposing of shares triggers capital gains tax.
- The gain = selling price of the shares – base cost of the shares.
- This differs from selling the property directly, which would trigger CGT inside the company instead of at shareholder level.
5. Example: R5 Million Property
Let's assume a company owns a commercial property worth R5 million and the shareholder sells 100% of the company's shares.
Scenario A: Property sold directly (not via shares)
- Buyer pays transfer duty on R5 million.
- Transfer duty = R456,000 (according to current SARS rates).
- If company sells the property, capital gains tax (CGT) is payable inside the company on any profit.
- Buyer may need to pay bond registration costs, transfer fees, etc.
Scenario B: Shares in the company are sold
- Buyer pays transfer duty on the R5 million share sale (same as
if the property were transferred).
- Transfer duty = R456,000.
- Seller pays capital gains tax on the difference between base cost of the shares and selling price.
- Property remains registered in the company's name → no Deeds Office transfer, no bond cancellation/re-registration fees, existing leases stay intact.
Result: In both scenarios, transfer duty is still payable. The real advantage in the share-sale route lies in avoiding additional costs (transfer attorney fees, bond cancellation, re-registration of security) and maintaining continuity in operations.
6. Other Considerations
- Loan Accounts: Shareholders often have loan accounts in the company. These are usually ceded to the purchaser together with the shares.
- Liabilities: Buyer inherits the company's debts, tax liabilities, and risks. Proper due diligence is essential.
- Estate Planning: Owning property through a company can simplify succession but may complicate tax compliance.
Conclusion
The sale of shares in a property-owning company can be a practical and cost-effective way to transfer ownership control, but it does not avoid transfer duty, and it has important CGT consequences for the seller. The true benefit lies in continuity and possible savings on transaction costs, rather than tax avoidance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
