Trusts in South Africa: How They Are Taxed and Why They Still Matter

Stacks of gold coins, a house model, a calculator, and a clock symbolizing trust taxation and estate planning in South Africa.

Trusts have been part of South African wealth planning for decades. They’re often linked to protecting family wealth, planning for estate duty, and ensuring assets last for future generations. But with SARS rules tightening — a flat 45% tax on retained income, Section 7C on loans, and restrictions on non-resident beneficiaries — many ask: are trusts still worth it?

The short answer: yes — but only when you understand how they’re taxed and use them for the right reasons.

How Trusts Are Taxed

Here’s what you need to know about how SARS taxes trusts:

  • Flat income tax rate: Any income retained in the trust is taxed at 45%, regardless of the amount.
  • Capital gains tax (CGT): If a trust sells assets and keeps the gain, the effective tax rate is about 36%.
    • If your trust is non-vesting and sells assets, the gain cannot be pushed to beneficiaries. This means you lose the chance for each beneficiary to use their R40,000 annual CGT exclusion, making the tax much heavier.
  • Interest income: Fully taxable at 45% if retained. Beneficiaries, however, get an annual interest exemption (R23,800 if under 65, R34,500 if 65 or older). This can make a big difference.
  • Dividends: Local dividends are exempt from income tax (but subject to dividends tax at source).

The key point? Trusts are not designed for hoarding income or gains inside. Instead, they work best when used with the conduit principle.

The Conduit Principle — Passing Income and Gains to Beneficiaries

The conduit principle lets trustees distribute income and gains to beneficiaries in the same year, so that the beneficiaries — not the trust — pay the tax. This allows them to use their exemptions and lower tax brackets.

Example 1: Interest income

  • Trust earns R100,000 in interest.
  • If retained: taxed at 45% = R45,000.
  • If distributed to Beneficiary A (under 65, in 31% tax bracket, with unused R23,800 interest exemption):
    • Only R76,200 taxable.
    • Tax = ~R23,600.
  • Result: A saving of ~R21,400 compared to keeping it in the trust.

Example 2: Capital gains

  • Trust sells shares for a R200,000 gain.
  • If retained: taxed at 36% = R72,000.
  • If distributed to Beneficiary B (with R40,000 annual exclusion):
    • Only R160,000 taxable.
    • At an effective 18% CGT = ~R28,800.
  • Result: A saving of ~R43,200.

This is why retaining income and gains inside a trust is usually the worst move — you pay more tax and lose valuable exemptions.

Section 7C — When Loans Become Donations

Most trusts are funded with loans from founders or family members. If those loans are interest-free or below the SARS official rate, Section 7C applies.

  • The shortfall in interest is treated as a deemed donation each year.
  • That deemed donation is subject to Donations Tax at 20%.
  • You do get a R100,000 annual exemption to reduce the donation.

Example: Interest-free loan

  • You lend R5 million to your trust with no interest.
  • SARS says: at 9% you should charge R450,000.
  • Deemed donation = R450,000 – R100,000 = R350,000.
  • Donations Tax = R70,000 each year.

Annual Donations — The Overlooked Estate Planning Tool

Not everything with trusts is about avoiding pitfalls. One of the smartest moves people miss is using the annual R100,000 donations exemption.

  • Each natural person in SA can donate R100,000 per tax year tax-free.
  • If you’re married, you and your spouse can each donate R100,000, meaning R200,000 per year can go into a trust without Donations Tax.

Why this matters

  • The donation removes value from your estate while you’re alive.
  • The trust owns the money, but as trustee you still keep some control.
  • Over time, this adds up — and the estate duty saving can be significant.

Worked Example: 20 years of donations

  • One person donates R100,000 per year into a trust.
  • After 20 years: R2 million transferred tax-free.
  • At death, estate duty saving =
    • 20% rate = R400,000 saved.
    • 25% rate = R500,000 saved.
  • If both spouses donate R100,000 each = R200,000 per year.
  • After 20 years: R4 million transferred.
  • Estate duty saving =
    • 20% rate = R800,000 saved.
    • 25% rate = R1 million saved.

All without paying a cent of Donations Tax along the way.

Why Trusts Are Still Useful

So, if trusts are taxed heavily, why keep them? Because they still give benefits tax alone can’t:

  • Asset protection: separates family wealth from personal creditors.
  • Estate duty planning: donated and transferred assets, plus their growth, stay outside your estate.
  • Succession and continuity: a trust doesn’t die; assets remain managed for the family.
  • Special needs: protects minors and dependants.
  • Charitable giving: family trusts structured as PBOs allow Section 18A deductions.

Final Thoughts

Trusts aren’t about tax tricks anymore. SARS has closed most of those doors. But trusts are still about legacy, protection, and continuity.

When you:

  • Use the conduit principle to pass income and gains smartly,
  • Avoid Section 7C traps on loans, and
  • Apply the R100,000 donations exemption year after year,

…you can protect your family wealth and save on estate duty at the same time.

With proper structuring and compliance, a trust remains one of the best long-term planning vehicles in South Africa.

    Disclaimer: This article is intended for general information purposes only and does not constitute professional tax advice. For tailored guidance, please speak to a registered tax practitioner.