Trading Property for Shares: A Strategic Way to Move Assets into a Company

By Sarah Nordien | Associate Director

Most property transactions follow a familiar script where a purchaser pays a purchase price, transfer duty may be triggered, and capital gains tax (CGT) is assessed at the point of disposal.

But there is another route – one that is often overlooked, yet highly effective in the right circumstances.

A section 42 asset-for-share transaction allows a property owner to transfer immovable property into a company in exchange for shares in that company. When structured correctly, it can offer both tax efficiency and commercial flexibility.

What is a section 42 transaction?

Section 42 of the Income Tax Act 58 of 1962 caters for what is commonly referred to as an asset-for-share transaction.

In simple terms:

• A person disposes of an asset to a company.
• Instead of receiving cash, that person receives equity shares in the company.
• The transaction is treated as a corporate restructuring mechanism rather than a conventional cash sale.

In the property space, this means that immovable property may be transferred into a company, with the transferor receiving shares in return. The value moves out of the property and into the company’s shareholding structure.

This is not a “sale” in the conventional sense. It is more of a restructuring.

The key tax advantages

The real appeal lies in the tax treatment.

1. No transfer duty. The transaction is exempt from transfer duty, which can represent a significant saving on high-value properties.

2. CGT is deferred, not avoided. Capital gains tax is not triggered at the point of transfer. Instead, it is deferred until the company eventually disposes of the property.

That distinction means:

• The tax liability is pushed down the line.
• The company effectively steps into the shoes of the original owner for certain tax purposes.

Section 42 is not a loophole. It is a recognised restructuring mechanism, but one that must be used carefully and correctly.

When does this strategy apply?

This type of structure is not for every transaction. It is typically used where there is a broader commercial objective, for example:

• Moving property into a corporate structure for asset protection or operational reasons.
• Preparing for future investment, succession or joint venture arrangements.
• Consolidating ownership within a company structure.
• Creating a more flexible ownership model, where dealing in shares is simpler than dealing in the property itself.

It is less about a once-off sale and more about repositioning an asset within a broader commercial framework.

The company law side is important as well

Where property is transferred to a company in exchange for shares, the transaction must work not only from a tax perspective but also from a company law perspective.

In practice, this means the company must be able to issue the consideration shares validly. A few practical issues arise immediately:

• The shares issued must be the correct class of shares, typically ordinary no par value shares.
• The company must have sufficient authorised but unissued shares available.
• If all authorised shares have already been issued, the company must first increase its authorised shares before the new shares can be issued.

That step is often overlooked. Parties may agree commercially that shares will be issued as consideration, but unless the company is properly authorised to issue them, the structure is incomplete.

The underlying corporate resolutions and share capital position must therefore align with the intended section 42 treatment.

Conveyancing Implications

From a property law perspective, this remains a transfer of immovable property and must still be attended to by a conveyancer and registered in the Deeds Office.

Although the consideration is shares rather than cash, the transaction still requires:

• A properly drafted asset-for-share agreement.
• Board and, where appropriate, shareholder resolutions.
• A clear description of the property and the shares to be issued.
• Alignment between the conveyancing process and the corporate implementation steps.
• Careful consideration of any tax, duty, compliance and structuring implications.

This is where the transaction becomes particularly technical. It sits at the intersection of conveyancing, company law and tax law.

Handle with Caution

Section 42 comes with strict requirements. If these are not met, the tax benefits can fall away.

Common risks include:

• Incorrect or unsupported valuations.
• Failure to meet the qualifying criteria under the Act.
• Issuing shares without the necessary authorised share capital.
• Triggering anti-avoidance provisions.
• Poor alignment between the legal documents and the intended tax outcome.

The form of the agreement, the corporate approvals, the share issue and the conveyancing process all need to support the same outcome.

Practical Implications

A section 42 asset-for-share transaction can be a powerful tool, but only where it is used deliberately and with a clear objective.

For property owners and businesses, the key questions are:

• What is the end goal — sale, growth, restructuring or succession?
• Does a company structure add real value?
• Can the company validly issue the shares required for the transaction?
• Are the tax deferrals worth the complexity?

Handled correctly, this approach can unlock flexibility and preserve value. Handled poorly, it can create unexpected tax exposure and conveyancing delays.

Not every property transfer needs to follow the standard playbook.

In the right scenario, swapping bricks and mortar for shares is not just a technical workaround. It is a strategic restructuring tool.

Need guidance on structuring a transaction like this?

The Property and Conveyancing team at Fairbridges advises on property restructures, asset-for-share transactions and related conveyancing mechanisms.

If you are considering transferring property into a company or want to assess whether a section 42 structure is appropriate, the team can assist in evaluating the legal and practical implications, aligning the conveyancing and corporate requirements and ensuring the transaction is implemented correctly.