The Income Tax Act generally provides tax relief for individuals who sell their houses, regardless of the motive behind the sale, as long as certain statutory conditions are met. However, this relief does not apply to the sale of company-owned houses, even if individuals are the ultimate beneficiaries of the company. Such disposals are subject to Capital Gains Tax (CGT). Additionally, this article uses masculine terms inclusively to refer to both genders.
The Income Tax Act grants an exemption from tax for individuals disposing of their principal private residence (PPR), which is defined as their sole or main house. However, this exemption only applies to properties owned by individuals in their personal capacity, subject to certain statutory conditions. A common misconception is that this exemption applies universally to anyone selling a house, but it is strictly limited to individual ownership, not extending to houses owned through companies or other entities. The exemption applies to houses owned by individuals in their legal capacity upon fulfilling certain statutory conditions as we will elaborate below.
The law
The Income Tax Act generally prescribes a CGT exemption on a ‘principal private residence of an individual who has owned the residence for the last five years prior to the date of the disposal.’ This might be a mouthful to comprehend at first glance but allow us to break it down in detail below.
Enter exemption
The said Act exempts an individual (not a company) from tax on income earned by way of a sale of his or her principal private residence. In the same vein, it is key to note that the term ‘principal private residence’ is not defined by the Act however, it is construed to mean the house to which such individual would naturally and as a matter of his or her habitual sequence, return from his or her economic or social pursuits. Conversely, where an individual owns multiple residential houses, they are obliged to prove beyond any reasonable doubt that a certain house is one he or she ordinarily resides in or considers to be their main house. Having clarified the exemption, let us now elaborate on why company-owned houses are inherently excluded from this exemption
Enter company houses
As alluded to above, individuals tend to put most of their assets under their companies as a way to build a strong asset base or for some other reason. However, in as much as it might seem justifiable that a house owned by a company which belongs to an individual is technically owned by that individual, such an assertion is not consistent with the tax laws. Therefore, it is of paramount importance to note that a company is a legal person which can sue or be sued. Consequently, such an entity can own and dispose assets in its own name.
Accordingly, any assets owned by that company literally belong to the company even though an individual might be the beneficial owner. In this regard, a house owned by a company is not owned by the shareholder for Income Tax purposes. Therefore, the exemption ceases to apply on a company-owned house even though it might be a principal private residence for the shareholder.
Conclusion
In essence, the exemption is only applicable where the house is owned by a natural person i.e., an individual. For individuals who enjoy the CGT exemption, it is not necessary that the person must have stayed in the PPR for the exemption to apply. There is also no requirement that the proceeds from a previous house be invested into another property.
Well, folks, we hope that was insightful. As we the two Yours Truies say goodbye, remember to pay Caesar what belongs to him. If you want to consult, join our free Tax WhatsApp group or to know about our 9 Tax e-books, send a text to +267 7181 5836 or email us at jhore@aupracontax.co.bw. You can read more tax articles on our website, www.aupracontax.co.bw under the ‘Tax articles’ tab.
