Generally, the Income Tax Act provides a tax relief for individuals who dispose of their houses. In such cases, the motive to sell does not matter but the Act requires a few statutory conditions to be fulfilled for one to enjoy the relief. In this regard, some individuals who acquire properties through their companies tend to assume that they can enjoy the same relief when they sell the company-owned house as they are the ultimate beneficiary. Allow us to clarify why disposal of a company-owned house is not free from Capital Gains Tax (CGT). In this article, words importing the masculine shall be deemed to include the feminine.
The basics
Basically, tax reliefs are granted to reduce the burden of tax on a person or to actually exempt certain income earned from tax. Accordingly, the Income Tax Act provides a tax relief in the form of an exemption to an individual who disposes his or her principal private residence. A principal private residence (PPR) is a person’s sole or main house. Now, the most contentious predicament which usually arises is whether or not the exemption applies to any individual who sells his or her house. Apparently, the exemption does not apply to any individual per se, rather it only 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 Income Tax 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 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 who 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 belongs 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 us the two Yours Truly say goodbye, remember to pay to Caesar what belongs to him. If you want to join our free Tax WhatsApp group or to consult or to know about our 9 Tax e-books, please send us a text on the cell number below.
