South Africans often use family trusts to protect assets, provide for children, and manage inter-generational wealth. A common technique is to move assets into a trust by selling them to the trust on credit, or by advancing cash that the trust will repay over time. That immediately raises the question: are loans to trusts legal in South Africa—and if so, what rules, taxes, and tripwires apply?

This guide explains what a trust is, how loans to trusts work in practice, the key tax rule (Section 7C of the Income Tax Act), why people use loans instead of donations, how to structure them properly, and where banks fit in.

What is a trust?

A trust is a legal arrangement where a founder (or settlor) transfers assets to trustees to hold and manage for beneficiaries under a trust deed. Ownership (by the trustees) is separated from benefit (by beneficiaries). In family trusts, trustees are often a mix of family and at least one independent professional. The trustees may buy assets, invest, and make distributions—always in line with the deed and their fiduciary duties.

Because many families do not want to (or cannot) donate large assets outright, they often finance the trust: the founder or a connected person lends the trust money (or sells an asset to it on vendor finance). The trust then repays the loan from future income, rental cash flows, or investment returns.

Are loans to trusts legal?

Yes. Loans to trusts are lawful in South Africa. They’re commonly used in estate and asset-protection planning. But they’re closely policed by tax rules to prevent people from parking assets in a trust while artificially avoiding tax. The main rule to understand is Section 7C of the Income Tax Act, which targets low- or interest-free loans to trusts.

Section 7C

Section 7C says that if a natural person (or a company they control) makes a loan, advance, or credit to a connected trust on terms that are interest-free or below the SARS “official rate”, the shortfall in interest each year is treated as a deemed donation by the lender to the trust.

When it bites: Each tax year, SARS calculates what interest would have been at the official rate, compares it with what you actually charged, and treats the difference as a donation made on the last day of the year of assessment.
Tax result: Donations tax is due on that deemed amount at current donations-tax rates (generally 20% up to a threshold and 25% above it). The annual R100,000 donations-tax exemption per natural person can reduce or eliminate the payable amount, but only up to that cap.
Who it covers: Loans by individuals to trusts (and by companies that are connected to those individuals) are typically in scope. This prevents people from interposing their company to dodge the rule.
How to avoid the deeming: Charge at least the official SARS rate on the loan and actually invoice/accrue it; or repay/waive the loan (bearing in mind the separate tax consequences of a waiver as explained below).

There are narrow exclusions (for example, certain special-needs “type A” trusts, or specific primary-residence scenarios), but most family-trust loans will be caught unless they bear market-related interest.

Why use loans to trusts at all?

If Section 7C creates an extra annual tax, why do people still use loans to trusts?

Estate-duty positioning: Selling a growth asset to a trust “freezes” the value remaining in your estate—the loan balance—while future growth happens in the trust. You still own an asset (the loan claim), but not the high-growth asset itself.
Cash-flow control: The lender can set repayment schedules, take security, or call the loan if governance goes off track.
Flexibility vs donations: Donations can trigger immediate donations tax and are irreversible. A loan lets you stage the transition and use the R100,000 annual exemption to chip away at the balance over time if that suits your plan.
Creditor and divorce resilience: Properly run trusts (with independent trustees and clean governance) can offer better asset-protection than leaving assets in your personal name.

Practical structuring tips

Put it in writing: Have a signed loan agreement that records the lender and borrower (the trustees in their representative capacity), the capital advanced or purchase price, interest rate, compounding/repayment terms, security (if any), events of default, and governing law.

Respect Section 7C: If you don’t want annual deemed donations, charge at least the official rate and accrue/record interest properly. If you prefer a low- or interest-free loan for cash-flow reasons, model the annual donations-tax cost and see if your R100,000 exemption will cover it.

Minute trustee authority: Ensure the trust deed allows borrowing and that a trustee resolution authorises the loan (and any security). Keep minutes, loan schedules, and statements up to date.

Watch the waiver trap: If you waive or write off the loan later, that can be a donation (triggering donations tax) and may invoke debt-reduction rules (which can cause capital-gains tax inside the trust). Get advice before forgiving capital.

Company lenders: If a company makes the loan and it’s connected to a natural person who is connected to the trust, Section 7C can still apply as if the individual made the loan. There may also be company-law and dividend-tax angles if money is first extracted from the company.

Keep the governance clean: Maintain separate bank accounts, proper financial statements, tax returns, and beneficial-ownership disclosures for the trust. Include an independent trustee and use dual signatories for payments above a modest threshold. Good governance helps prevent the trust being seen as your alter-ego.

Model the cash: Can the trust actually service the loan? Typical repayment sources are rental income, investment yields, or discretionary distributions taxed efficiently to beneficiaries. A realistic cash-flow model avoids arrears and preserves relationships.

Mind other laws: The National Credit Act can apply depending on the parties and purpose. Banks and auditors may require FICA/KYC and comfort that the loan is arm’s length, even if you charge the official rate.

Will banks make loans to trusts?

Yes, commercial loans to trusts happen, but banks assess trusts as higher-risk borrowers. Expect to see:

Personal sureties from trustees or founders;
Cession of investments or bonds over property;
Slightly higher interest rates or fees;
Extra paperwork (trust deed, letters of authority, trustee resolutions, financials, and proof of an independent trustee).

A bank loan can be useful where the trust buys property or needs bridging finance, but weigh costs and security requirements against simply advancing a private loan that complies with Section 7C.

Loans to trusts vs donations: which is better?

Neither is “always better”—they solve different problems. Donations are simple, but trigger donations tax upfront if above your annual exemption, and you surrender control. Loans to trusts let you keep a claim (and therefore leverage and oversight), spread the transition over years, and fund repayments from the asset’s own cash flows—at the cost of Section 7C exposure unless you charge a market-related interest rate. Many planners blend both: sell an asset to the trust on loan, then reduce the loan annually using the R100,000 exemption to keep Section 7C in check.

Key risks if you get it wrong

Annual donations-tax bills under Section 7C that you didn’t plan to pay;
A waiver that triggers donations tax and possible CGT inside the trust;
A trust that can’t service the loan, forcing asset sales;
Governance failures (no independent trustee, no minutes) that invite SARS or creditor challenges;
Estate-duty leakage because you died still holding a large loan claim with no liquidity to settle estate costs.

Each of these can be avoided with a written loan, realistic cash-flows, disciplined records, and tax-aware repayments.

How Crest Trust helps

We design and administer loans to trusts that are practical, compliant, and tax-aware: drafting loan agreements and trustee resolutions, modelling Section 7C exposure, aligning repayments with cash flows, maintaining registers and minutes, and acting as the independent trustee who keeps governance on track.

Conclusion

Loans to trusts are not only legal in South Africa, they’re a mainstream tool for moving growth assets into a protective structure while keeping sensible control and cash-flow flexibility. The difference between success and headache lies in the details: a written loan agreement, trustee resolutions, real governance with an independent trustee, and a clear plan for Section 7C, whether you charge at least the official rate or consciously manage the annual deemed-donation outcome. Add realistic repayment modelling, tidy records, and awareness of the consequences of waiving or reducing the loan, and you’ve got a strategy that can freeze estate value, fund future growth in the trust, and avoid nasty tax surprises.

If you’re considering loans to trusts, or need to remediate an existing arrangement, Crest Trust can help you design, document, and administer a structure that works in real life. We’ll model the tax impact, draft compliant agreements and resolutions, serve as your independent trustee where needed, and keep your governance airtight so your trust delivers the protection and inter-generational benefits you intended.

FAQs

Can I loan money to a trust?

Yes. Individuals routinely advance loans to trusts or sell assets to a trust on credit. Use a written agreement, confirm the trust may borrow, pass trustee resolutions, and decide whether to charge at least the official interest rate (to avoid Section 7C donations) or accept/manage the annual deemed-donation outcome.

Can a loan be given to a trust?

Yes, by private individuals, companies, and banks. Private loans are common in estate planning; banks will also lend but typically require security and personal sureties, plus full trust documentation and an independent trustee.

What is a Section 7C loan to a trust?

It’s shorthand for a low- or interest-free loan to a connected trust that falls under Section 7C of the Income Tax Act. Each year, the interest shortfall (the official rate minus the rate you charge) is treated as a deemed donation by the lender, potentially attracting donations tax unless covered by exemptions.

Will banks lend to a trust?

Yes, but on stricter terms than to salaried individuals. Expect security (bonds or cessions), personal sureties from trustees, robust governance, and comprehensive paperwork. Rates and fees may be higher to reflect risk.

Are Loans to Trusts Legal in South Africa?