Advisors and clients still use loan accounts to transfer assets into trusts, often perceiving them as simple and efficient structures. The idea seems straightforward: rather than donating assets and triggering donations tax, an individual sells assets to a trust on a loan account, allowing the trust to grow its wealth over time. In practice, however, these loans often accumulate and remain outstanding for years, creating unintended tax and estate-planning consequences. What begins as a seemingly straightforward arrangement can, over time, undermine the very purpose of establishing a trust.

Section 7C of the Income Tax Act 58 of 1962 was introduced to address the perceived tax advantage of interest-free or low-interest loans to trusts when attempting to transfer wealth below market value. Where a connected person advances a loan to a trust at a rate lower than the official rate of interest, the difference between the charged rate and the official rate is treated as a deemed donation. This deemed donation recurs annually for as long as the loan remains in place, and it is subject to donations tax at 20%, or 25% on amounts exceeding the applicable threshold. Although the first R100 000 of donations per year is exempt, this exemption is quickly exceeded where significant loan balances exist. The position can be even more complex where loans are made to companies in which a trust holds shares, as such arrangements may also fall within the ambit of section 7C.

A significant and often overlooked issue is the impact of outstanding loan accounts on death. Any unpaid balance forms part of the lender’s dutiable estate, which means the value effectively comes back into the estate for estate duty purposes. The intended benefit of removing growth from the estate can therefore be lost entirely.

Compounding the problem, many of these loans are informal. Missing or vague repayment terms, the absence of written agreements, and a lack of evidence of interest being charged expose the structure to SARS scrutiny and undermine the trust’s integrity and asset-protection objectives.

To manage these risks effectively, loan accounts should be treated as active elements of the estate plan rather than passive accounting entries. Proper structuring of debt is essential to minimise the tax consequences for the estate. This includes setting terms that reflect commercial principles, ensuring clarity on repayments, and actively managing loan balances over time. If loans are advanced, all loans should be properly documented, with clear terms, repayment schedules, and interest provisions, and the trust’s structure should be reviewed regularly to ensure it remains compliant and aligned with the client’s long-term goals.

Trusts still play a vital role in inter-generational wealth planning in South Africa, but they must be managed carefully. Section 7C has fundamentally changed the landscape of trust funding, and interest-free or low-interest loans are no longer a benign feature of estate planning. With proper debt structuring, clear documentation, and ongoing management, it is possible to minimise the tax consequences for the estate while ensuring that the trust continues to safeguard family wealth rather than inflate the taxable estate.

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