Q: A relative, Ms L, is giving up her home in a retirement village and moving into frail care. She bought life rights in the retirement village scheme about 17 years ago.

The life right gave her the right to occupy the unit for the rest of her life but should she leave the unit for whatever reason (move out, die or move into frail care), the retirement village would repurchase the life right and pay the same amount that she paid for it back to her or to her estate.

In terms of the agreement, the village would use the profits from the sale of the life rights when residents vacate to offer them subsidised frail-care rates and levies.

In addition, now that she is entering frail care, some of the repurchase price will be withheld to cover potential costs in frail care. How should she declare this money for tax purposes? Presumably there is no capital gains tax (CGT).  Name withheld

A: Deborah Tickle, tax lecturer at the University of Cape Town, replies:

As with any arrangement, the tax position relating to retirement villages arrangements will always depend on the contractual agreement between the parties and there are many different permutations in the market. Without viewing the contract in detail one can never be sure what the contractual arrangements are. But let’s assume Ms L bought the life rights for R250,000 and she will receive R250,000 as a repurchase price from the retirement village on her departure from the unit.

The village management may sell the life right in the unit to another retiree at R5m, realising a profit of R4.75m, but Ms L will have no involvement in that sale and has no rights in the amount realised.

Because Ms L is now moving into the frail care, she has also agreed (in terms of the original agreement) that 50% of the R250,000 paid to her by the retirement village for the life right in the unit, will be withheld by the retirement village as a guarantee in case she defaults on her future frail-care costs — like a deposit. However, this amount will be repaid to Ms L or her estate when she leaves the frail care, and her bills are paid up to date.

Based on these assumptions, the tax implications for Ms L would be as follows:

The life right is viewed as being akin to a lease in immovable property for capital gains tax purposes which, in the hands of a natural person (Ms L) is seen as a “personal use asset”; if any capital losses are realised on the disposal. Such losses are specifically disregarded. The converse is, however, not the case and any capital profits are not disregarded.

In Ms L’s situation the proceeds (R250,000 in our example) are equal to the base cost (the original purchase price of R250,000) and there is thus no gain or loss, in any event. Ms L must, nevertheless, declare these two amounts on her tax return.

The deposit-guarantee withheld by the retirement village to ensure Ms L covers her future costs has no further tax implications for Ms L unless interest is accrued on it for her account (this would also need to be reflected on her tax return but only any excess over the exempt interest amounts would actually be taxed in her hands).

Assuming she pays all her frail-care costs and levies when due, this “deposit” will be returned to her or her estate when she leaves the village with no further tax implications.

That the retirement village uses its “profits” from the ongoing sales of the life rights in the units to keep the levies at a reasonably low level will also not any have specific tax implications for Ms L.

• Send your personal finance questions to money@arena.africa 

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