When it comes to scaling down for retirement, selecting the right home is probably the most important decision.
It can also have a significant impact on the inevitable “end of life legalities” that one leaves behind, says Michelle Dommisse, director of Michelle Dommisse & Associates.
Today’s retirees have the option of investing in a life right or sectional title unit. In broad terms, a life right is usually the more affordable option, especially as no transfer duty is payable on purchase.
Another advantage is that there is no heavy maintenance for owners and levies are usually forecast in advance. When the purchaser dies, no capital gains tax is payable and the full purchase price is refunded to the owner’s estate, less a small administration fee.
“Some life right developers share a percentage of the capital appreciation with the person who purchases the life right (or their estate). We have seen life right agreements where the developer shares 15% of the profit, and retains 85%, and we have seen agreements where there is no sharing of the profit.”
While a life right is an “excellent retirement option”, Dommisse says it also has its risks. “I ask my clients if the life right they are buying includes a frail care facility, because in many cases residents are only allowed to live there as long as they can live independently. If they cannot, they can be forced to sell.”
The concepts of lifestyle and location are key to sectional title retirement purchases, and both drive long-term capital appreciation.
“If you have decided to live in an area that is in high demand and is consistently going up in value, it makes sense to want to achieve 100% of the profit, and even with the inevitable capital gains tax penalty, this could greatly benefit your eventual estate.
“In many cases it boils down to an emotional rather than a financial decision. There is something very appealing about owning your own home, having pets and even a garden, especially while you are still fit and want your independence.”
In many cases life right options do allow pets, but the process is restrictive because of the apartment-style model and small spaces. Ultimately, the importance of a well-drafted will for those who want to provide for the best interests of their loved ones cannot be under-estimated.
“Apart from estate duty, which is applicable for any estate over R3.5 million, there are ways to structure an estate so that capital gains and income tax are minimised.”
Dommisse says a common request she hears from clients during estate planning is that they own, say, five properties and have five children so want their estate divided equally.
“This means each child will receive a 20% ownership of five properties, whereas it would be better to leave each property to a specific individual.
“The reason is simple. Transfer duty is not applicable when property is bequeathed in a will so an enormous amount would be saved for the estate.”