Low interest loans to trusts now have some bite

I've previously written about the new rules relating to interest free or low interest loans to trusts, but the final amendment changes the game yet again and you could be in for some bad news.

Here are the salient points most likely to affect you.

1) The section now applies to trusts or companies in which the trust owns at least a 20% interest.

2) The difference between the interest calculated at the official rate (currently 7,75%) and the interest actually charged is now deemed to be a donation and subject to Donations Tax (currently at 20%).

3) Every natural person is allowed to make donations totalling R100 000 in each tax year free of Donations Tax, so, this R100 000 can be deducted from the deemed donation if no other donations were made.

4) The section does not apply if the loan was made to acquire the primary residence of the donor or their spouse.

5) Individuals are allowed to earn the following amounts of interest free of tax each year -

    Under 65 years old   R23 800

    65 and older            R34 500

    So it makes sense to charge the trust interest up to these allowances, which would be doubled if both spouses made the loan and charged interest.

6) Here's an example which is close to zero tax effect of s7C.

    You lent the trust R2 000 000 and gave R2 000 000 to your spouse (no Donations Tax between spouses) who also lent it to the trust, both loans being initially interest free.

    At the official interest rate, the interest would be 7.25% x R2 000 000 = R150 000.

    You are both over 65 so you each decided to charge interest at 1.725% = 1.725% x R2 000 000 = R34 500 which is tax free.

    The amount by which you are under-charging interest is therefore R150 000 - R34 500 = 115 500. This is deemed to be a donation by each of you.

    R100 000 of the donation is free of Donations Tax, so R15 500 is subject to Donations Tax. The tax is R15 500 * 20% = R3 100 each.


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