PROPOSED CHANGES TO TAX LAW IN SOUTH AFRICA: INTERESTFREE LOANS AS A TOOL IN ESTATE PLANNING?

Abstract

Estate planning often involves the sale of an asset by an estate planner (the owner of the asset) to an inter vivos trust, as a related family trust. It also often happens that the buying trust does not have the necessary funds to pay the purchase price. In this situation it is common practice to finance the sale by means of an interestfree loan agreement. The buying trust becomes the owner of the property, while the purchase price remains due and payable to the seller, without the loan amount accruing interest. The result achieved by the estate planner is that potential further growth of the asset soldis shifted to the trust, resulting in an estate duty benefit for the seller. The debate surrounding the use of the interest-free loan as an estate planning tool has been polarised for years with most researchers concluding that the interest-free loan remains a useful estate planning tool. Doubts regarding the use of such agreements and the trust for estate planning have recently neem renewed. Since 2013, several statements by the different Ministers of Finance, in their respective budget speeches, indicated that government will propose tax avoidance legislation that will directly impact the taxation of trusts and connected parties to a trust. This study will focus on the effect which the recent proposed changes to the Income Tax Act (58 of 1962) might have on the use of interest-free loans as an estate planning tool. The study is qualitative in nature with document analysis at its core. The main aim is to provide more clarity to estate planners in this regard. The research concludes that the interest-free loan still has some advantage as an estate planning tool, but if estate planning is done with only tax planning and tax savings as motivation, that advantage may disappear.

Keywords

• Trusts, interest-free loans, income tax, taxation, estate duty, Wealth tax

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