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Tax Considerations When Investing Inherited Funds Through a Trust in South Africa
- 14 April 2025
- Individuals Tax
- The Tax Faculty Tax Specialist
This article is based on tax law for the year ending 29 February 2026.
Question :
An individual has inherited R1 million from a deceased parent’s estate and is considering investing these funds in property or other income-generating assets. The income derived from this investment is intended to benefit their siblings. The individual is contemplating establishing a trust with the R1 million as initial capital, but is concerned about the possible application of Section 7 of the Income Tax Act, and is seeking the most tax-efficient approach.
Answer:
The Problem / Facts
The Problem / Facts:
An individual has inherited R1 million from a deceased parent’s estate and is considering investing these funds in property or other income-generating assets. The income derived from this investment is intended to benefit their siblings. The individual is contemplating establishing a trust with the R1 million as initial capital, but is concerned about the possible application of Section 7 of the Income Tax Act, and is seeking the most tax-efficient approach.
Analysis of the Tax Issues Identified:
The primary concern is whether Section 7 of the Income Tax Act will attribute the income generated from the R1 million investment back to the donor if it is channelled through a trust to benefit connected persons (i.e. the siblings). Section 7 is aimed at preventing the diversion of income to connected persons to minimise overall tax liability. The fact that the funds originate from an inheritance does not, in itself, exempt the arrangement from the application of Section 7. The analysis also considers alternative strategies that may be more tax-efficient in meeting the individual’s objectives.
Relevant Tax Provisions:
-
Attribution of Income (via Donation, Settlement or Disposition): Section 7 of the Income Tax Act 58 of 1962.
Applicable Law:
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Income Tax Act 58 of 1962, in particular Section 7.
Application of the Law to the Facts:
If the individual transfers the R1 million to a trust and the income generated by the trust accrues to the benefit of the siblings, Section 7 of the Income Tax Act may apply. This could result in the income being deemed taxable in the hands of the individual. The inherited nature of the capital does not provide an automatic exemption from these attribution rules.
In light of this, the individual should explore alternative, tax-efficient approaches, including:
- Direct Investment and Donation: Investing the funds personally and donating the income to the siblings. Donations tax will apply to amounts exceeding the annual R100,000 exemption.
- Loan to the Trust: Lending the funds to a trust at the official interest rate. Interest earned on the loan would be taxable in the individual’s hands, but further income in the trust may not be attributed back, depending on the trust structure and distributions.
- Alternative Investment Structures: Consideration of other tax-efficient investment vehicles.
- Estate Planning Review: A comprehensive estate plan to ensure optimal structuring and tax efficiency for long-term asset distribution.