On 26 November 2025, the South African Revenue Service (SARS) released a draft Interpretation Note on section 7C of the Income Tax Act No. 58 of 1962. Section 7C is an anti-avoidance provision. It targets interest-free or low-interest loans used to fund trusts.
The tax authority’s message is clear. There is no such thing as an informal, interest-free loan to your trust anymore. This position amounts to a direct warning to young South Africans who increasingly use trusts as wealth vehicles.
While the draft Note does not change the law, it explains how SARS interprets section 7C. Importantly, it signals how aggressively the authority expects taxpayers to comply. SARS invited written comments on the draft Interpretation Note (IN), and taxpayers submitted their comments by 16 January 2026.
Building generational wealth early
The use of trusts is not new. However, we now see a growing number of younger South Africans using them. These include entrepreneurs, first-generation wealth creators, crypto investors and young professionals.
A trust can serve as a smart wealth planning tool. It can also protect assets by keeping future growth out of personal estates. In addition, it can help build generational wealth early, but only if you fund the structure correctly. This development makes SARS’s stance a practical warning to young South Africans who assume flexibility still exists.
Failing to fund a trust correctly can trigger an unexpected annual donations tax. It can also lead to transfer pricing adjustments, understatement penalties, disputes with SARS, and downstream estate duty consequences.
Trust popularity and rising tax risk
As more young people accumulate assets earlier in life, trusts increasingly form part of the conversation. Individuals build assets through small businesses, side hustles, equity compensation, or crypto gains. Trusts offer continuity, asset protection and estate planning efficiency if used correctly.
However, many overlook a critical point. The tax rules governing trusts no longer resemble the flexible terrain they once were. The days of simply setting up a trust and lending it money interest-free, as a connected person, have ended. This shift should serve as a further warning to young South Africans entering trust structures for the first time. Since its introduction in 2017, section 7C has transformed how taxpayers may fund trusts.
As SARS stated:
To restrict taxpayers’ ability to transfer wealth to a trust without incurring tax, section 7C was introduced, effective from 1 March 2017. This section applies to any loan, advance or credit provided under specific circumstances to a trust by a connected person who must be a resident. It covers loans made to the trust on or after 1 March 2017, including those made before the effective date.
SARS has repeatedly amended the provision. It has closed gaps and countered new structures designed to bypass the anti-avoidance rules under section 7C. These amendments apply whether the trust sits in South Africa or abroad.
Section 7C in plain terms – the real cost of interest-free funding
The draft IN reinforces how the law already operates. If you lend money to your trust and you do not charge at least the official rate of interest, SARS intervenes.
The official rate is currently the repo rate plus 1 percent. SARS treats the difference between the interest you charged and the interest you should have charged as foregone interest.
SARS then treats this foregone interest as a deemed donation each year. This treatment can trigger donations tax at 20 percent unless an exemption applies. This rule applies even if the trust is offshore. It also applies if you advance the loan through a company you own. Furthermore, it applies where you use preference shares or indirect funding mechanisms. In substance, form will not shield you.
Offshore trusts are not a shortcut
Low-tax jurisdictions such as Mauritius and the Cayman Islands remain popular for offshore trusts. Their tax rates are significantly more favourable than the rate applicable to South African trusts.
South African trusts face tax at 45 percent. As a result, many younger investors gravitate toward offshore structures marketed as tax-efficient wealth vehicles. However, SARS has made its position clear. Section 7C applies to South African resident taxpayers, even if the trust sits outside South Africa. This clarification stands as yet another warning to young South Africans who believe geography alone changes the tax outcome.
Notably, the draft IN remains silent on how section 7C interacts with transfer pricing principles that govern cross-border loans. At this stage, this lack of guidance creates uncertainty for taxpayers who fund offshore trusts. Tax specialists will likely raise this issue in their submissions to SARS. They will seek greater clarity in future versions of the IN.
The risk for new trust users – small mistakes, high costs
First-time trust users face a significant challenge. Many mistakes are not obvious.
Common examples include:
- Charging the wrong interest rate.
- Failing to formalise the loan.
- Using a company to fund the trust incorrectly.
- Relying on generic offshore trust solutions.
- Not documenting exemptions properly.
These errors can trigger a chain of non-compliance issues with SARS. For individuals who are only starting to build wealth, these missteps create costly setbacks. Fortunately, proper structuring can avoid them entirely. Trusts still work, but only if you understand the rules
In conclusion
Trusts remain valuable tools for long-term wealth creation. They offer protection, continuity, and planning flexibility that other structures struggle to replicate. However, younger South Africans who enter this space for the first time must take note. The message from SARS is unmistakable.
Section 7C remains firmly in place. SARS interprets it broadly and expects full compliance. This stance should operate as a clear warning to young South Africans who underestimate the compliance burden. A trust can become a powerful structure. Alternatively, it can become a tax problem. The outcome depends entirely on how you fund it.
If you already have a trust, or if you plan to establish one, consult trust tax experts without delay. Ensure that you comply fully with the tax rules. Otherwise, you risk stepping into a costly donations tax trap that could follow you for years.
 |
 |
| Darren Britz | Partner | Head | Tax Legal | mail me | | Anelmari Truter | Tax Attorney | mail me | |
| | Tax Consulting SA | | |
