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Loans to Trusts - Section 7C
- 23 November 2023
- Accounting
- Marita Jordaan
This FAQ article is based on tax law for the year ending 29 February 2024.
1. Background
The trustee of a trust has granted a loan to the trust to buy a holiday home. Section 7C was therefore applied to the loan. The holiday home became a primary residence in 2023 this tax year. Will Section 7C still apply or will there be a portion in this tax year treated as a Section 7C loan and a portion as the exemption of Section 7C?
2. The Problem / Facts
Has the trustee, by granting a loan to a trust for the purchase of a holiday home that has since become a primary residence, affected the application of Section 7C?
3. Applicable Law
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Section 7C of the Act
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Interpretation Note 67 Connected Persons
4. Application of the Law to the Facts
Section 7C applies when a loan has been directly or indirectly provided to a trust in relation to which that natural person is a connected person and no interest (or interest below the official rate of interest) is charged on the loan. The loan was provided by the trustees of the trust, therefore, they are considered connected persons of that trust. In terms of section 7C(5), the tax consequences of section 7C will not apply if the trust used the proceeds from the loan to acquire a primary residence, which is used by the lender of the loan or his/her spouse.
5. Conclusion
The trustee is the provider of a loan to the trust and a connected person in relation to the trust. Furthermore, the trust used the proceeds from the loan to acquire a primary residence which is used by the trustee as a primary residence, therefore s 7C(2) and s 7C(3) will not apply in terms of s 7C(5).
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