Do you need to charge interest on a loan to a trust?

If you’ve ever lent money to a family trust — or you’re thinking about it — you’ve probably heard someone mention “Section 7C” and immediately switch off. It sounds technical, but the idea behind it is actually quite simple. This article breaks it down in plain language, walks through what the law actually says, and uses real-number examples so you can see exactly how it works.

The short answer

Yes — in most cases, if you lend money to a trust, you need to charge interest at least at a rate set by SARS (called the “official rate of interest”). If you don’t, SARS treats the interest you should have charged as a donation, and you may have to pay donations tax on it every single year the loan is outstanding.

That’s Section 7C in a nutshell. Now let’s unpack why this rule exists and how it actually works.

Why does Section 7C exist?

Before 2017, it was common for people to lend money to their family trust completely interest-free, or at a very low interest rate. Over time, this became a popular way to shift wealth out of a person’s personal estate and into a trust — without triggering estate duty or donations tax, because no money was technically being “given away.” It was just a loan.

SARS and National Treasury saw this as a loophole being used to avoid tax, so they introduced Section 7C of the Income Tax Act 58 of 1962, effective 1 March 2017, specifically to close it. The rule has been tightened and expanded several times since then, including to cover loans made to companies that are owned by a trust, and cross-border loans to foreign trusts.

What the law actually says

Section 7C is an anti-avoidance provision. In essence:

Where a natural person (or, in some cases, a company at that person’s instruction) grants a loan, advance, or credit to a trust — or to a company owned by a trust — and charges no interest, or interest below the “official rate of interest,” the difference between what was charged and what should have been charged at the official rate is treated as a donation made by that person to the trust, on the last day of the trust’s year of assessment.

A few key terms worth explaining:

• “Connected person” — Section 7C only applies where the lender is a “connected person” in relation to the trust. In practice, this generally means the founder of the trust, a beneficiary, or someone closely related to either of them (such as a relative).
• “Official rate of interest” — This is not an interest rate you choose. It’s set by SARS with reference to the South African Reserve Bank’s repo rate, and is defined in the Seventh Schedule to the Act. It currently sits at the repo rate plus 1%.
• “Deemed donation” — This is the legal fiction at the heart of Section 7C. Even though no money actually changed hands as a “gift,” SARS treats the foregone interest (the interest you didn’t charge) as if you donated that amount to the trust.

What happens if you don’t charge enough interest?

If the interest you charge is below the official rate (including if it’s zero), the shortfall is treated as a donation, and donations tax may become payable on it.

Here’s how the numbers work:

• Donations tax rate: 20% on cumulative donations up to R30 million (since 1 March 2018), and 25% on any amount above that.
• Annual exemption: The first R150 000 of a person’s total donations in a tax year is exempt from donations tax (increased from R100 000 with effect from the 2026/27 tax year). This exemption is shared across all your donations that year — not just the Section 7C amount — so if you’ve made other donations too, they eat into the same allowance.

Importantly, this isn’t a once-off event. The deemed donation is recalculated every single tax year, for as long as the loan remains outstanding. So an interest-free loan doesn’t just have a one-time tax cost — it creates a recurring, annual donations tax exposure until the loan is repaid, forgiven, or interest starts being charged at the official rate.

When does Section 7C not apply?

There are some exclusions built into the law, including (among others):

• Loans to special trusts used mainly for the benefit of a person with a disability.
• Loans used to fund a primary residence owned by the trust, in certain circumstances.
• Loans to public benefit organisations.
• Situations where the trust uses the loan to fund a business and the loan is subject to normal transfer pricing rules instead.
• Loans made as part of an approved employee share incentive scheme.

These exclusions are quite specific and technical, so if you think one might apply to you, it’s worth getting advice tailored to your situation.

Worked examples

Numbers make this a lot easier to follow than theory alone, so here are three scenarios showing how the calculation actually plays out. In each case, assume the official rate of interest is 7.75% (repo rate + 1%), and that the lender hasn’t already used up their annual donations tax exemption on other gifts that year.

Example 1: An interest-free loan to the trust

Sarah lends her family trust R2 000 000 on 1 March and doesn’t charge any interest at all. By the end of the tax year (28/29 February), the loan is still fully outstanding.

Interest that should have been charged (R2 000 000 × 7.75%)	R155 000
Interest actually charged	R0
Deemed donation	R155 000
Less: annual exemption	−R150 000
Taxable amount	R5 000
Donations tax payable (20%)	R1 000

So Sarah owes SARS R1 000 for that tax year. And because Section 7C doesn’t stop applying just because a year has passed, this exact calculation runs again every following year for as long as the R2 000 000 sits interest-free.

Example 2: A loan with some interest, but not enough

Peter lends his trust R1 500 000 and charges 3% interest a year — better than nothing, but still below the 7.75% official rate.

Interest that should have been charged (R1 500 000 × 7.75%)	R116 250
Interest actually charged (R1 500 000 × 3%)	R45 000
Shortfall (deemed donation)	R71 250
Less: annual exemption	−R150 000
Taxable amount	R0
Donations tax payable	R0

Peter’s shortfall of R71 250 falls entirely within his R150 000 annual exemption, so no tax is due this year. That said, he’ll still need to track and declare the deemed donation, and if his loan were larger — or he’d made other gifts during the year — the outcome could look very different.

Example 3: A loan charged at the official rate

Thandiwe lends her trust R3 000 000 and charges interest at exactly 7.75%, matching the official rate.

Interest that should have been charged	R232 500
Interest actually charged	R232 500
Shortfall	R0
Donations tax payable	R0

Because Thandiwe is charging at least the official rate, there’s no shortfall for Section 7C to catch, and no deemed donation arises. (One thing to keep in mind: the trust still has to actually pay her this interest, and that interest income will generally be taxable in her hands.)

Practical takeaways

1. Check your loan agreements. If you or a family member has an outstanding loan to a trust, work out whether interest is being charged, and at what rate.
2. Compare against the official rate, not a “market” or “commercial” rate — Section 7C specifically uses SARS’s official rate, which changes when the repo rate changes.
3. Remember it’s recalculated annually. This isn’t a once-off cost; it recurs every tax year the loan is outstanding.
4. Declare it properly. A deemed donation under Section 7C must be declared to SARS using the relevant donations tax form, even in years where no tax ends up being payable because of the exemption.
5. Get advice for your specific structure. Trusts, connected persons, and cross-border arrangements can get complicated fast — a registered tax practitioner can help you work out whether Section 7C applies to you, and whether restructuring the loan makes sense.

This article is for general information purposes only and does not constitute tax or legal advice. Interest rates, thresholds, and exemptions referred to above are subject to change, and you should consult a registered tax practitioner or attorney regarding your specific circumstances.