How should we structure an interest-free loan and annual donations to our son?

1. Interest-free loan to your son

You may lend R2 million to your son on an interest-free basis. However, it is essential that the arrangement is properly documented by means of a formal loan agreement setting out the exact amount, repayment terms, and the fact that no interest will be charged.

From a tax perspective, an interest-free loan between parents and a child is generally allowed and will not, trigger donations tax.

It is important to remember that the outstanding loan remains an asset in your estate until it is repaid or waived and will therefore be taken into account for estate duty purposes (death tax).

2. Annual donations of R300 000

You and your spouse may make annual donations to your son to assist him in repaying the loan.

Following the 2026 Budget Speech, the annual donations tax exemption for natural persons was increased from R100 000 to R150 000 per person per tax year. This means that, as a couple, you can collectively donate up to R300 000 per annum without incurring donations tax.

Any donations exceeding the annual exemption will attract donations tax at a rate of 20%.

By making annual donations within the exemption limits, your son can use the donated funds to reduce the outstanding loan balance over time.

Suggested structure

1. Advance the R2 million as a formal interest-free loan
Ensure that a properly drafted loan agreement is in place. The agreement can provide for flexible repayment terms and confirm that no interest is payable.

2. Each parent donates R150 000 annually
Each of you can donate R150 000 per tax year, giving a combined donation of R300,000 per annum without attracting donations tax.

3. Your son uses the donations to repay the loan
The donated funds can then be applied towards reducing the loan balance. This creates a clear audit trail and proves that the donations and loan repayments are separate transactions.

4. Keep proper records
Maintain supporting documentation for all donations and repayments. This will be important should the South African Revenue Service (Sars) ever request evidence of the transactions and their purpose.

Important considerations

Record-keeping is essential

Large family transactions are often scrutinised by Sars. Your documentation should clearly distinguish between:

The loan (which is repayable)
The donations (which are not repayable)
The repayments made by your son

Estate planning benefits

As the loan balance reduces over time, the value of your estate is also reduced. This can assist in lowering future estate duty exposure.

You should also review your will and consider including a provision dealing with the outstanding loan balance on your death. Depending on your objectives, the loan could be bequeathed to your son or forgiven on death, subject to the broader estate planning implications.

By bequeathing the outstanding loan to your son upon death, he will not have to repay the balance into your estate.

Section 7C

Section 7C of the Income Tax Act should not apply as your loan is made directly to your son and not a trust.

Final thoughts

This structure can be both compliant and tax-efficient if implemented correctly. A formal loan agreement, annual donations within the available exemptions, and good record-keeping will be key to ensuring the arrangement achieves both your estate planning and family wealth transfer objectives.

I hope this helps.

All the best,

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