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From 1 March 2007, until further amendment, individuals may donate an amount of R100 000 in total during a year of assessment, which ends on the last day of February. Previously this amount was less.

One of the recommendations made to reduce a person's estate or to limit the growth thereof is, for example, to transfer assets to a child or a family trust in exchange for a loan owing by the transferee to the transferor. In the will the balance of such a loan is usually bequeathed to the borrower, who then discharges the debt.

The exemption in respect of donations is also utilised by writing off the exempt amount against the loan annually in order to reduce the balance of the loan in the long term.

The introduction of capital gains tax (CGT) on 1 October 2001 has made this estate planning technique a little less successful. If the loan is reduced or discharged without payment by the borrower, CGT is payable by the borrower on the benefit received. The reduction or discharge of the loan by means of a testamentary bequest or the annual exemption in respect of donations implies that the borrower has not made any payments and has therefore received this benefit.

However, liability for CGT can be avoided by funding the transaction by means of cash. The bequest must be correctly worded in the will so that the correct procedure can be followed in the administration of the estate. The recommended and safe method is for the borrower to pay back the full outstanding balance to the estate and for the executor to pay the cash bequest to the borrower, when authorised to do so. By so doing, the problem of there being no cash flow, is eliminated. 

As far as loans are concerned, the person to whom the loan is owing may annually donate a cash amount equal to the annual exemption to the borrower, and the borrower then pays back the same cash amount as payment on the loan.

For more information, please do get in touch with Francois Meyer

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