Who pays the tax on reducing a loan to a trust and are there exclusions?

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What the South African Revenue Service (SARS) aims to achieve with the debt reduction rules is to tax the taxpayer (the borrower) on any tax deduction/tax advantage that the borrower has achieved or will achieve in future resulting from any “debt benefit”; therefore undoing any such historic or future tax deduction/tax advantage in the hands of the borrower. It does not deal with taxing the lender.

Can trustees apply and apportion expenses in such a way as to experience the greatest tax advantage?

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Because the South African Revenue Service (SARS) has begun to view trusts as a means of structured tax avoidance, a number of measures have been introduced over the years resulting in the income of trusts being taxed at 45% - the highest rate applicable to individuals - and capital gains being taxed at 36%, the highest effective rate applicable to any taxpayer (although the effective tax rate for a capital gain distributed to a shareholder in a company is now at a higher rate of 37.92% after the increase of the dividend tax rate in February 2017).

Writing down loans to trusts is a minefield for the unwary

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Often assets are moved into trusts on loan account due to the fact that trusts do not have access to cash to buy the assets. Traditionally this was also a very effective way to move growth assets away from your personal estate into a trust in order to prevent the attraction of estate duty on such growth. However, since March 2017 the South African Revenue Service (SARS) introduced an anti avoidance provision to prevent such estate duty savings (Section 7C of the Income Tax Act).

Preserve your wealth for future generations

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Most people who have accumulated wealth in their lifetimes, or who have inherited wealth, prefer to see their wealth spread beyond the next generation. A trust is the most effective vehicle for the preservation of wealth. A well run trust allows succeeding generations to participate in, and benefit from, the wealth created in one or more prior generations. One only has to consider the large numbers of students that still benefit from bursaries created by people like Cecil John Rhodes.

How to manage the disadvantages of trusts

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Even though trusts are great vehicles to use in your estate planning, they may have disadvantages. Some of these disadvantages can be managed, and others need to be accepted. Either way, trusts are certainly not for everybody.

Let a trust protect you during your life when you need it most

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Lately a number of people who created trusts in the past are questioning their rationales for creating trusts, especially given new taxes implemented to discourage estate owners to structure their affairs using trusts. When transferring assets into a trust, it is not only about considering the tax savings or the additional taxes payable on such assets. It is also about a strategy to protect your assets, to create continuity and liquidity upon your death, as well as other considerations, such as a contingency plan should you develop a mental illness such as Alzheimer’s Disease.

Can trusts provide interest free loans to others?

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During the last couple of years there was a great focus on loans made by a connected person to a trust, or a company held by a trust, since the South African Revenue Service (SARS) introduced the punitive tax measures (Section 7C of the Income Tax Act) on such interest-free or soft loans (where interest is charged at a rate below the official interest rate, currently 7.75%), in an attempt to combat estate duty/donations tax leakage on assets moved into trusts, or companies held by trusts.

Can you change the name of a trust?

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A trust is recognised by its unique registration number, and not by its name. One is not required to reserve the name of a trust before it is registered. For companies one has to reserve its name before it is registered. There may therefore be multiple trusts in South Africa with the same name. It is wise not to make the name of the trust too recognisable, such as your surname, so that creditors cannot trace the trust too easily.