Sanlam : What to Do About Loans to Trusts

'Typically, the scenario would have allowed you to 'write-off' the loan and avoid donations tax through the annual tax-exemption on trust assets of up to R 100 000. The growth in the value of the asset took place in the hands of the Trust and you, as the lender, therefore reduced your personal estate thereby minimising the risk of insolvency and exposure to estate duty amongst other benefits.

'But now SARS has decided that although there is nothing illegitimate about the transfer of wealth to a Trust, the practise of not charging interest on such loans is akin to a donation,' says Thomson.

He explains that SARS' reasoning is that if the loan was made in the ordinary course of business by parties unconnected to each other, market-related interest would have been charged.

'As of 1 March, as a lender you must charge interest at a rate no less than the annual repo rate plus 1% p.a. This currently equates to 8%. Failure to do so can result in a taxable donation equal to the amount of interest forgone or the difference between rate being charged and the 'official rate'.'