Non-Residents or Foreigners Buying Property in South Africa
Globalisation and technological advancement has opened up SA to international markets in a whole new light. Today a large number of investors are actively-seeking opportunities for buying South African property as well as long-term leases for foreign investment or business expansion.
For many the property market, especially residential property stock, make South Africa a haven for foreign purchasers.
Subsequently, more and more locals are finding themselves concluding deals with foreign counterparts with the ability to fund transactions entirely or largely in cash.
Given this trend we have put together a breakdown of the more salient aspects for a non resident buying property in South Africa.
Restrictions on foreigners buying property in South Africa
Although there are no restrictions, there is a prohibition on illegal aliens owning immovable property in South Africa. Non-residents are subject to the same laws and regulations as South Africans when it comes to buying property in South Africa. Compliance with these regulations ensures the efficiency of the South African land registration system and security of tenure.
Registration of property
A non-resident may decide to own the property through share ownership in a company, membership in a close corporation, or as a beneficiary in a trust. If a non-resident acquires property in the name of an entity, funds brought into the country will represent a loan to the local entity and it will require Exchange Control approval.
Property in South Africa is, however, most often registered in the name of the purchaser, as an individual or natural person.
A non-resident can purchase South African property over the internet without entering the country. However, without a valid permit to temporarily remain in the country after the purchase of the property, or a permanent residency permit, the purchaser will be deemed to be violating the requirements of the Immigration Act, if the purchaser wishes to reside in South Africa on a temporary or permanent basis.
Bringing foreign funds into South Africa to buy property
Foreign funds can be paid into any bank account in South Africa. It is common practice for the foreign purchaser to pay the purchase price for the property bought into the trust account of the estate agent that brokered the sale, or into the account of the conveyancing attorney who attends to the registration of the transaction. Both the estate agents and attorneys are covered by Fidelity Funds.
These funds guard against theft or negligence on the side of the agent or the attorney. The deposit and all the other payments that constitute the purchase price are only paid to the seller on registration of the transaction in the local deeds registry. In the interim, the funds could be invested at the non-resident’s instruction and for his or her benefit. The operation of such investments is regulated by the estate agents’ and attorneys’ professional boards.
When a non-resident transfers funds from a foreign source into a South African bank account, a record known as a ‘deal receipt’ is kept of the foreign funds received by the South African bank.
Borrowing money in South Africa to purchase property
Non-residents are restricted in their borrowing ration to 50% of the purchase price, while the remaining 50% must be brought into the country in cash from a foreign bank. In order to qualify for a South African mortgage bond, the non-resident will have to provide proof of income and comply with the Financial Intelligence Centre Act. This act requires identification of the non-resident for money laundering purposes. It also involves the production of certain documents such as passport and proof of residential address. In addition, and subject to certain exceptions, if the purchaser is married under the laws of a foreign country, his or her spouse will also be required to sign the mortgage bond documentation.
Opening a bank account at a South African banking institution
A non-resident can only make payments on a mortgage bond if he or she opens a non-resident banking account. This can only be done from within the country. An application form detailing name, passport number and address, certified copies of the relevant pages of the passport and proof of source of income will be required. In certain circumstances, local currency can be deposited into the account, for example rental income received from property belonging to the non-resident. This is dependent on the bank being in possession of a certified copy of the rental agreement. This type of deposit, as well as any other ZAR deposit into the non-resident account, will require the Reserve Bank’s approval, because non-residents are not allowed to generate income in South Africa, other than interest or rental income generated from the foreign funded capital asset.
All sale agreements or contracts to buy land in South Africa must be in writing. It has to include certain prescribed information and it has to be signed by the seller and the buyer to be valid and legally binding. Neither party can withdraw from the contract without incurring legal consequences, except if the agreement is subject to certain conditions which are not fulfilled. Another exception is if the purchase price is less than R 250 000 and certain additional criteria, in terms of the Alienation of Land Amendment Act, are present, entitling the purchaser to ‘cool off’ and thereby cancel the sale.
In South Africa it is customary for the seller of immovable property to nominate the attorneys that will attend to the transfer of the property. The purchaser, however, pays the attorneys’ fees. The election to nominate the conveyancer is the prerogative of the seller, and it is his or her responsibility to ensure that the process is driven by the party who has least interest in delaying the transfer. A late transfer implies lost interest and opportunity costs to the seller. The attorney appointed by the seller acts on the seller’s behalf. In the event of a dispute between the seller and purchaser, the attorney will have a conflict of interest and it is in the purchaser’s best interest to seek independent legal advice.
There are a number of variable costs that should be considered when determining the total amount involved in all property transactions. Apart from the purchase price, the purchaser is also responsible for the following costs:
These are the fees payable to the attorneys. These depend on the purchase price of the property. For more information see our tables of cost.
A tax levied on the purchase price of the property. This amount has to be paid before the purchase and it must be paid on demand from the attorneys. The Transfer duty is a cumulative fee and is calculated as follows:-
- R0 to R750 000: 0%
- R 750 001 – R1 250 000: 3% of the value above R750 000
- R1 250 001 – R1 750 000: R15 000 + 6% of the value above R1 250 000
- R1 750 001 - R2 250 000: R45 000.00 + 8% of the value above R1 750 000
- R2,250,001 and above: R85 000 + 11% of the value above R2 250 000
Bond cost based on the loan amount
These costs relate to the costs incurred in raising mortgage finance. You also have to allow for mortgage registration costs, which are payable to the registering attorney according to a prescribed schedule.
Banks normally stipulate that the bond be registered for an amount that is usually about 20% higher than the amount that has been loaned. This ensures that the bank’s debt is secured if the outstanding balance exceeds the original loan amount. The seller has to pay the cost involved in cancelling a bond.
Other costs include costs involved in drafting agreement of sale, conveyancer’s sundry expenses, rates clearance certificate, issue of guarantees, property inspection fees, insurance premiums, building loans (interim interest), pro rata share of rates and taxes.
Documentation and administration
A purchaser need not physically be present in South Africa to sign the documents that are required for the registration of transfer of ownership in the property.
The documents do, however, have to be signed either before a Notary Public or at the South African Embassy in the foreign country. Practical considerations such as time and money implies that it is in the best interest of the non-resident, whether selling or buying, to execute a special Power of Attorney prior to departing from South Africa in favour of a South African friend, family member or attorney so that this person can act and sign documents on his or her behalf. People sometimes forget that an affidavit cannot be signed by the person holding the Power of Attorney on your behalf. This implies that there will still be some documents for such client to sign abroad.
The offer to purchase
A deposit isn’t mandatory, but it does communicate good faith on the part of the purchaser and it is an indication of financial capability. Provision will be made in the Agreement for a guarantee to be called for in respect of the balance of the purchase price.
Occupation refers to the individual physically living on the premises. Occupational rental has to be paid by the party occupying the property belonging to another. So in the event the purchaser takes occupation prior to transfer he or she will be liable for these payments, as stipulated in the agreement.
Capital Gains Tax (CGT)
This is not a separate tax, but forms part of the income tax system and, as the term implies, is a tax on capital gains. Currently, non-residents are liable for CGT on the taxable gain made on the disposal of immovable property in South Africa, or any right or interest in immovable property in South Africa, such as a long term lease and so on.
Sale of Property in South Africa by Non Residents
There are provisions in terms of Section 35A of the Income Tax Act aimed at preventing non-resident Sellers of property in SA from disposing of property without paying capital gains tax due to SARS.
Section 35A states that a Purchaser of property from a non-resident Seller must withhold funds from the amount due to the non-resident Seller and pay the funds to SARS. These funds are used by SARS to pay the Sellers tax due to SARS.
More information on Section 35A Property Sales
Author: Barry Davies