Your interest-free trust loan is a tax problem you may have

4 days ago
7 min read

There is a tax rule in South Africa called Section 7C. Most people who own family trusts have never heard of it. Yet it has been quietly creating annual tax bills since 2017 — and SARS has just made very clear it is coming after anyone who has not been complying.

Why South Africans use family trusts — and how the tax trick worked

A family trust is a legal arrangement where you transfer assets — property, shares, a business interest — out of your personal name and into a structure managed by trustees on behalf of beneficiaries, usually your family. The appeal is real: assets held inside a trust at the time of your death generally fall outside your personal estate, which means they are not exposed to estate duty in the same way your personal assets would be.

For years, the standard method of getting assets into a trust was to sell them on loan account. Instead of donating the asset outright — which triggers donations tax immediately — you would sell it to the trust and allow the trust to owe you the purchase price. You would then charge little or no interest on that loan. The asset grows in value inside the trust over time, but your estate only reflects the original loan amount. The growth effectively bypasses your estate. No donations tax upfront. No growth tax on death. It was a clean, widely used structure.

SARS always knew this was happening. Section 7C is the response.

What Section 7C actually says — without the legal language

Section 7C of the Income Tax Act 58 of 1962 came into effect on 1 March 2017. The core principle is straightforward: if you lend money to a trust and charge less than the official interest rate, SARS treats the interest shortfall as a donation that you made to the trust. That deemed donation is subject to donations tax. And it is recalculated every single year for as long as the loan remains outstanding.

The official rate SARS uses is the repo rate plus one percentage point — currently sitting at 9.25% per annum.^[3] If your loan charges nothing, or charges less than that, the gap between what you did charge and what you should have charged is what SARS treats as a gift. You are then taxed on that gift at the donations tax rate.

"There is simply no such thing as an informal, interest-free loan to your trust anymore."

— Tax Consulting SA, December 2025

Donations tax is charged at 20% on cumulative donations up to R30 million, and 25% on any amount above that.^[5] Every person does get an annual exemption — a portion of donations each year that is tax-free — but on any substantial loan balance, that exemption makes only a small dent in what is owed.

When is the tax due?

Most trusts have a year-end on the last day of February. The deemed donation is calculated on that date. You then have until 31 March to submit SARS form IT144 and pay donations tax. Miss that deadline and penalties and interest begin to accumulate on top of the original liability.

This rule has been getting stricter every year

Section 7C did not arrive fully formed. It started in 2017 targeting direct loans from individuals to their connected trusts. Since then, National Treasury and SARS have expanded it steadily through successive Taxation Laws Amendment Acts.

The net now covers loans made through a company that is connected to the individual, not just personal loans. It covers loans to foreign trusts, not just local ones. It covers indirect funding structures — including preference share arrangements — that were previously used to sidestep the provision. Each time a workaround appeared, it was legislated away.

The most recent amendment took effect on 1 January 2025, when the Taxation Laws Amendment Act 42 of 2024 narrowed an exemption that previously applied to loans subject to transfer pricing rules.^[6] Before this change, any loan caught by the transfer pricing provisions was entirely excluded from Section 7C. Now only the portion actually adjusted under the transfer pricing rules escapes Section 7C — the remainder is still treated as a deemed donation. For anyone with an offshore trust, this is a significant shift.

Think your company protects you? It does not.

If your company lends money to your trust at your request or under your influence, and that results in wealth being transferred from you to the trust, Section 7C applies to your company's loan in exactly the same way it would apply to a personal loan from you directly.^[8]

SARS just published a formal enforcement guide

In November 2025, SARS released Draft Interpretation Note 2025-42, titled "Loan, advance, or credit granted to a trust by a connected natural person." The comment period closed in January 2026.^[7]

An Interpretation Note does not change the law — it tells you, and SARS's own officials, exactly how the law will be applied. This one is detailed and deliberate. It introduces a "conscious decision" test around when a loan is considered to have been made at the instance of the connected person. It spells out which exemptions are narrow and which will not hold up. It signals that informal arrangements, loose trust minutes, and undocumented structures will not survive scrutiny.

"The tax authority's message is clear. SARS signals how aggressively it expects taxpayers to comply."

— Tax Consulting SA, responding to Draft IN 2025-42

The "vested rights" exemption is narrower than you think

Section 7C does include an exemption for trusts where beneficiaries have fixed, locked-in rights to the trust's assets — what lawyers call vested rights. But the draft Interpretation Note is explicit: if trustees have any discretion to vary how benefits are distributed between beneficiaries, that exemption falls away entirely. Most family discretionary trusts do not qualify.^[9]

If your trust is offshore, it is even more complicated

South Africans who use foreign trust structures for asset protection or international estate planning face an additional layer of complexity following the 2025 amendments.

Where a loan to a foreign trust was previously subject to South Africa's transfer pricing rules under section 31 of the Act, the loan used to be fully excluded from Section 7C. That full exclusion no longer exists. Tax professionals at Cliffe Dekker Hofmeyr have highlighted that affected taxpayers may now face simultaneous liability under both the transfer pricing rules and Section 7C — on the same loan.^[10]

Double exposure risk

In certain cross-border trust structures, the combined effect of income tax and donations tax has been estimated to potentially reach effective rates of 65% to 70% of the loan amount.^[11] If you have an offshore trust and an outstanding inter-company or personal loan to it, get specialist advice immediately.

It is also worth noting that for foreign currency loans, the applicable official interest rate is not South Africa's repo-based rate. It is the central bank rate of the relevant foreign currency, plus one percentage point — so the benchmark shifts depending on the currency in which the loan is denominated.^[12]

Who is at risk — check whether this affects you

Section 7C is not limited to old-money families with elaborate inter-generational trust structures. Tax Consulting SA observed in December 2025 that a growing number of younger South Africans — entrepreneurs, first-generation wealth creators, and even crypto investors — are now setting up trusts and inadvertently walking into Section 7C exposure without realising it.^[13]

If any of the following applies to you, you need to take action:

You sold a property, shares, or any other asset to your family trust on a loan account
Your trust owes you money and you have been charging no interest, or less than the current official rate
You are a trustee or beneficiary of a trust that has an outstanding loan from someone connected to it
Your company has lent money to a trust connected to you
You have a foreign trust and have been funding it through an inter-company loan or personal advance
You set up a trust recently and have not taken specific Section 7C advice

If your trust has a February year-end — as most do — the deemed donation for the current year has already been calculated as at the last day of February 2026. The tax is due by 31 March 2026. If you are reading this after that date, you may already be in arrears.

What you need to do about it

The steps are not complicated, but they need to happen in the right order and with proper documentation:

Step 1Identify every outstanding loan from you personally, or from any company connected to you, to any trust you are connected to.
Step 2Confirm what interest rate is being charged on each loan. Compare it to the current official rate. If the rate charged is lower, a deemed donation has occurred.
Step 3Calculate the deemed donation for the year ending 28 or 29 February. Apply your annual donations tax exemption. The balance is subject to donations tax at 20%.
Step 4Complete SARS form IT144 and pay the donations tax. The deadline is 31 March following the trust's year-end.^[15]
Step 5Review the loan terms going forward. Either charge the correct rate of interest or obtain proper advice about restructuring the arrangement to reduce ongoing exposure.

Talk to a professional — it is worth the cost

A registered tax practitioner can calculate your exact liability, advise on whether your trust structure qualifies for any of the available exemptions, and help you get right with SARS before the penalties compound. The cost of getting it wrong is always higher than the cost of getting proper advice.

Legal References & Sources

Income Tax Act 58 of 1962, section 7C — as amended by successive Taxation Laws Amendment Acts.
SARS Draft Interpretation Note 2025-42, "Loan, advance, or credit granted to a trust by a connected natural person" (26 November 2025). sars.gov.za
Moneyweb, "The impact of Section 7C" (July 2024); SARS Draft IN 2025-42 — official rate at repo + 1%.
Werksmans Attorneys, "Section 7C: SARS's Draft Interpretation Note Signals Assertive Approach to Wealth Transfers" (March 2026). werksmans.com
SARS, Donations Tax (updated March 2026). sars.gov.za/types-of-tax/donations-tax/
Taxation Laws Amendment Act 42 of 2024, s 4(1)(b); BDO South Africa, "Interest-free loans to foreign trusts" (May 2025). bdo.co.za
Tax Consulting SA (Britz & Truter) via Daily Investor, "SARS warning for these South Africans" (December 2025). dailyinvestor.com
WTS Renmere, "The Section 7C Net Tightens: An Analysis of the Draft Interpretation Note" (January 2026). renmere.co.za
Ibid. — vested rights and bewind trust analysis.
Cliffe Dekker Hofmeyr, Tax & Exchange Control Alert, "Your interest-free loan to a foreign trust…" (January 2025). cliffedekkerhofmeyr.com
Werksmans Attorneys, op. cit.
Cliffe Dekker Hofmeyr, op. cit. — foreign currency official rate methodology.
Tax Consulting SA / Polity.org.za, "SARS's new guidance sends warning to young South Africans making use of trusts" (December 2025). polity.org.za
PKF South Africa, "ABC of Section 7C and the Tax Implications" (2025). pkf.co.za
SARS External Guide GEN-DNT-01-G01, "Manage Donations Tax" (effective February 2025).

This article is published for general information purposes only and does not constitute legal or tax advice. All legislative references are to the Income Tax Act 58 of 1962 as amended. Rates and deadlines quoted are current as at May 2026 and are subject to change. Readers should consult a registered tax practitioner before taking or refraining from any action based on the contents of this article. TaxConsultSA accepts no liability for reliance on this publication.

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