How to transfer property to one heir without being unfair to others

Question: I am 80 years old and have a daughter who lives in my rental property. She will inherit it when I pass away. She would like to take over the ownership now.

How do I do this in such a way that I won’t trigger too many taxes and am fair to my other children?

Answer: The simplest way to stay even-handed is to separate the two issues of occupying the house and ensuring that the ultimate value each child receives remains fair.

There are two options open to you.

Option 1: Sell now and ‘be the bank’

This is often the cleanest option because you manage the transaction yourself. The key is to agree on a market-value price. Always get at least two independent valuations and settle on a fair midpoint.

Selling below market value may feel generous, but it creates a deemed donation equal to the discount, and that can trigger donations tax of 20%. It will also not be fair on your other children if one gets a valuable asset at a discount.

Once the price is agreed, a conveyancer draws up a sale agreement and registers a bond in your favour for the outstanding balance. You charge a reasonable interest rate and set a repayment schedule. I recommend that you charge interest at the repo rate +1%, as you do not want this to be considered a soft loan that triggers donations tax.

If the child who is buying your property does not have sufficient funds, then you may donate R100,000 a year to that child and offset it against the loan. If you have a spouse, he or she could also donate R100,000 to that child. I recommend that you keep note of these donations and include a paragraph in your will that these amounts would be offset against that child’s inheritance.

Your child should pay the transfer duty and conveyancing costs. You, as the seller, may face capital gains tax (CGT) on the increase in value since purchase, because the second house doesn’t qualify for the R2-million primary-residence exclusion.

If you die before full repayment of the loan, the executor either collects the balance or, depending on your will, treats the outstanding amount as part of your equalisation between heirs.

Option 2: Bequeath later and equalise through your will

If the CGT and transfer costs feel steep or liquidity is tight, you can keep the property and simply bequeath it to the resident child in your will. You can provide equivalent value to the other child through cash, investments or a life-insurance policy designed to equalise inheritances.

The main downside is timing. On death there is a deemed CGT disposal in your estate, and transfer can take months through the executor’s process.

Creating fairness

If you sell now, you can insert a loan-offset clause in your will. If you die with a balance of the loan still owed by the child, that loan is bequeathed to the borrower. The other children’s inheritance would be increased by the same amount from other assets.

Alternatively, the loan can remain collectible by the estate and the non-resident child’s inheritance is adjusted to reflect that value.

Get the documentation right

Always keep two signed valuations on record. Use a conveyancer to handle the sale. Register the bond properly and keep the repayment schedule and insurance proof on file. Update your will to reflect the arrangement and add a short letter of wishes explaining the reasoning. The letter of wishes is not legally binding, but it helps your children to understand your intentions.

I would suggest that you hold a family meeting where you explain the logic: that one child’s benefit lies in the house and the others’ in matching value elsewhere.

Selling your second house to the child who lives in it can be perfectly fair if you embed a clear equalisation in your will. The moment you capture these numbers in writing, you replace potential emotion with clarity. DM

Kenny Meiring is an independent financial adviser. Contact him on 082 856 0348 or at financialwellnesscoach.co.za. Send your questions to kenny.meiring@sfpwealth.co.za

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R35.