Lending Money to Family vs. Tax-Free Donations: What You Need to Know
Many people wonder if lending money to a family member is a better alternative to giving a R100 000 tax-free donation each year. The reasoning is simple: “If I lend it, it’s not a gift, so maybe it won’t be counted in the estate.”
Here’s the reality:
– When you lend money to a family member, the amount you lent becomes part of your estate as a loan account.
– This means that, for estate duty purposes , the loan is treated as an asset in your estate when you die.
– In effect, whether you give it as a tax-free donation or lend it, the value is still included in your estate calculation.
Why does this matter?
Even though lending may give the appearance of keeping control, the estate duty rules treat the loan account as part of the estate. So the “tax-saving” benefit is largely the same — the R3.5 million estate duty allowance will usually cover it for smaller to medium estates.
Practical takeaway:
– If your goal is simply to pass money to family without triggering donations tax, giving R100 000 per year can be simpler than maintaining formal loan agreements.
– If you want to retain some control or require repayment , then a loan might make sense — just know that it won’t change the estate duty outcome.
– Either way, early planning and understanding your estate duty allowance is key.
As always, discuss these options with your accountant or financial planner to choose the strategy that best fits your family’s financial situation.