On 26 November 2025, South African Revenue Service (Sars) released a draft Interpretation Note on section 7C of the Income Tax Act, No. 58 of 1962, the anti-avoidance provision aimed at interest free or low interest loans used to fund trusts. The tax authority’s message is clear: there is simply no such thing as an informal, interest free loan to your trust anymore.

While the draft Note does not change the law, it sets out how Sars interprets section 7C and, importantly, signals how aggressively the authority expects taxpayers to comply. Sars has invited written comments on the draft Interpretation Note (IN), which must be submitted by 16 January 2026.

The use of trusts is nothing new. In practice we see growing number of younger South Africans, including entrepreneurs, first generation wealth creators, crypto investors, and young professionals, are starting to use trusts. A trust is a smart wealth planning tool and a way to protect assets by keeping future growth out of personal estates, and start building generational wealth early, but only if the structure is funded correctly. 

Failing to do so can trigger unexpected annual donations tax, transfer pricing adjustments, understatement penalties, disputes with Sars, and even downstream estate duty consequences.

Trusts Are Becoming More Popular With Younger Wealth Builders, But So Are The Tax Risks

As more young people begin to accumulate assets earlier in life, whether through small businesses, side hustles, equity compensation, or crypto gains, trusts are increasingly part of the conversation. They offer continuity, asset protection and, if used correctly, estate planning efficiency.

What is often missed is that the tax rules governing trusts are no longer the flexible, easy terrain they used to be. The days of simply setting up a trust and lending it money interest free, as a connected person, are gone.

Since its introduction in 2017, section 7C has transformed how trusts may be funded, and as stated by Sars: 

“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 to close gaps and counter new structures used to bypass the anti-avoidance rules under section 7C, whether the trust is in South Africa or abroad. 

Section 7C In Plain Terms: The Real Cost of Interest Free

The draft IN reinforces how the law already works.

If you lend money to your trust and you do not charge at least the official rate of interest, which is currently the repo rate plus 1 percent, Sars treats the difference between what you did charge and what you should have charged as foregone interest. This foregone interest is treated as a deemed donation every year, which can trigger donations tax at 20 percent unless an exemption applies.

This applies even if the trust is offshore, the loan is advanced through a company you own, or preference shares or indirect funding mechanisms are used.

Offshore Trusts Are Not a Shortcut

Low tax jurisdictions such as Mauritius and the Cayman Islands remain popular locations for establishing offshore trusts, largely because their tax rates are significantly more favourable than the tax rate applicable to South African trusts.

With South African trusts taxed at 45 percent, many younger investors are drawn to offshore structures marketed as tax efficient wealth vehicles. But Sars has made it clear that section 7C applies to South African resident taxpayers, even if the trust sits outside South Africa. 

It is noted, however, that the draft IN remains silent on how section 7C interacts with the transfer pricing principles that apply to cross border loans. At this stage, the lack of guidance leaves uncertainty for taxpayers who fund offshore trusts. It is expected that tax specialists will raise this point in their submissions to Sars, in order to seek greater clarity in future versions of the IN.

The Risk for New Trust Users: Small Mistakes, Big Costs

The biggest challenge for first time trust users is that the mistakes are not always 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 series of non-compliance issues with Sars.

For individuals who are only starting to build wealth, these are costly setbacks that can be entirely avoided with proper structuring.

Trusts Still Work, But Only if You Understand the Rules

Trusts remain extremely valuable tools for long term wealth creation. They offer protection, continuity, and planning flexibility that is hard to replicate elsewhere.

But for younger South Africans stepping into this space for the first time, the message from Sars is unmistakable: Section 7C is here to stay, it is broadly interpreted, and Sars expects full compliance.

A trust can be a powerful structure, or a tax problem, depending on how you fund it.

If you already have a trust, or plan to set one up, it is advised that you consult trust tax experts without delay and ensure you comply with the tax rules properly to avoid stepping into a costly donations tax trap that could follow you for years.

Written by Darren Britz, Partner and Head of Tax Legal at Tax Consulting SA; and Anelmari Truter, Tax Attorney at Tax Consulting SA.