Disposal of investments is one aspect which attracts some tax technicalities, particularly the sale or transfer of investments such as immoveable property. A profit or gain realised from such a disposal is generally exposed to tax commonly known as Capital Gains Tax. One interesting and rather peculiar aspect regarding this tax is that a gratuitously transferred property may result in a tax obligation. In essence, a property freely transferred from one person to another actually triggers tax.
Today’s article seeks to examine and clarify how a property transferred for free may actually result in a tax debt. As a tax firm, we intend to demystify the technical jargon applicable to the issue at hand and enhance your understanding of tax matters.
Firstly, it is imperative that we understand that the tax under discussion is principally triggered by a gain realised subsequent to a disposal of a property. Technically, a capital gain arises in instances where disposal proceeds exceed the cost of the property and any allowable deductions enshrined in the Act.
If we now turn to a property that has been freely transferred to another party, it might seem plausible to disregard the Capital Gains Tax as it may appear that the property was not sold since the transaction would not involve transfer of money. However, the Act equates a gratuitous transfer with an actual sale. This mystery is embedded in the term ‘disposal’ as defined by the Act.
The Act defines the term “disposal” to include transactions that involve gratuitous transfer of property. The Act states that disposal includes “any transaction which has the effect of transferring any immovable property”. Simply put, if you give your relative or a friend a piece of land or a building, it is construed as a disposal. The golden question that would obviously arise from such a construal is, how can someone pay tax when they did not even receive a thebe?
The disposal value of a property transferred for free is technically construed to be the prevailing market value at the date of transfer. Consequently, any arising capital gain will be determined based on the said market value and a deduction of the respective cost of acquiring the asset. Accordingly, where the property in question was also acquired for free, e.g. by way of inheritance or as a gift, the deductible cost will be the equivalence of the market value of the property on the day the property was acquired.
On the other hand, a disposal of a principal private residence by an individual which was owned for at least five years is exempt from Capital Gains Tax. For avoidance of doubt, a principal private residence technically refers to a person’s sole or main residential house.
A transfer of property is by no means different from an actual sale as it equally triggers Capital Gains Tax in the hands of the transferor. In essence, the tax laws have no regard for property freebies save for a person’s principal private residence owned for at least five years.
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