The Truth About Trusts: Tax Consequences and Estate Planning in South Africa

Trusts have long served as flexible and powerful instruments for estate planning in South Africa. They enable founders to separate legal ownership from beneficial enjoyment, often for the protection of assets and long-term family succession. However, the tax consequences associated with trusts are complex and can materially affect their utility if not fully understood. This article explores the principal taxes applicable to trusts under South African law and assesses whether a trust remains an effective estate planning vehicle in today’s regulatory and fiscal environment.

Overview of Taxes Affecting Trusts

Trusts are subject to a wide range of taxes depending on how they are structured and administered. Below I will give you a detailed review of the main forms of taxation applicable to South African trusts.

1. Income Tax

Trusts are regarded as separate taxpayers in terms of the Income Tax Act 58 of 1962. A trust's income can be taxed in one of three ways:

• In the hands of the beneficiary, if the income vests in the beneficiary during the same tax year;
• As income of the trust itself, if retained;
• As income of the donor or founder, under the attribution rules in sections 7 and 25B of the Income Tax Act.

The standard income tax rate for trusts (excluding special trusts) is a flat 45%, the highest marginal rate under the South African tax system. However, the conduit principle, recognised in section 25B, allows income to flow through to beneficiaries and be taxed in their hands if the trust deed permits and if income is distributed in the same year of assessment.

2. Donations Tax

Where assets are transferred into a trust gratuitously, such a transaction may trigger donations tax in terms of the Income Tax Act 58 of 1962, read with section 7 of the Donations Tax Act 107 of 1969, which is now consolidated under the Income Tax Act. The applicable rate is 20% on the value of donations up to R30 million, and 25% on the portion exceeding R30 million.

Donations between spouses are generally exempt, but transfers to a trust, unless falling within a specific exemption, are typically taxable, and these transactions must be carefully structured to avoid unintended consequences.

3. Estate Duty

Estate duty is governed by the Estate Duty Act 45 of 1955. Trust assets are generally excluded from the dutiable estate of the founder if effectively alienated during the founder’s lifetime. However, if the founder retains any beneficial interest or control, the provisions of section 3(3)(d) of the Estate Duty Act may apply to include such assets in the dutiable estate.

Estate duty is levied at 20% on the first R30 million of the estate and 25% on the balance. The effectiveness of a trust in reducing estate duty hinges on whether assets have been properly transferred and whether the founder has retained any de facto control.

4. Transfer Duty

Under the Transfer Duty Act 40 of 1949, trusts are not granted the same preferential rates as natural persons when acquiring immovable property. The duty is calculated on a sliding scale, but trusts and juristic persons are typically taxed at a flat rate of 13% on property valued above R11 million.

It is also worth noting that SARS may apply anti-avoidance provisions if it appears that property was transferred to or through a trust structure to avoid transfer duty.

5. Capital Gains Tax (CGT)

Capital gains tax is administered under the Eighth Schedule to the Income Tax Act 58 of 1962. Trusts are taxed on capital gains at an 80% inclusion rate, which, when applied to the 45% tax rate, results in an effective CGT rate of 36%.

Like income, capital gains can be attributed to beneficiaries under paragraph 80(2) of the Eighth Schedule, provided the gain vests in them during the year of assessment. This offers planning opportunities to reduce the CGT burden by utilising beneficiaries’ lower tax brackets or annual exclusions.

6. Value-Added Tax (VAT)

Trusts that carry on an enterprise with taxable supplies exceeding the registration threshold of R1 million per annum must register for VAT in terms of the Value-Added Tax Act 89 of 1991. Once registered, the trust must charge VAT on its taxable supplies and is eligible to claim input tax credits, subject to the usual rules.

A Word on Tax Avoidance

It is expressly cautioned that a trust should never be established solely for tax avoidance purposes. The South African Revenue Service (SARS), in conjunction with the courts, applies a substance-over-form doctrine. Sham trusts, or those where the founder retains de facto control over the assets, may be disregarded, and income or gains taxed in the hands of the founder or another party.

Anti-avoidance provisions such as those in section 103 of the Income Tax Act and section 3(3)(d) of the Estate Duty Act have been successfully applied to pierce artificial trust arrangements.

Strategic Value of Trusts in Estate Planning

While trusts are no longer the tax havens they were once perceived to be, they retain significant non-tax advantages, including:

• Asset protection from creditors and divorcing spouses;
• Continuity across generations, avoiding the delays and costs of winding up an estate;
• Controlled succession, especially for minor or financially immature beneficiaries;
• Ring-fencing of business assets, particularly in family-owned enterprises.

A trust is best used as part of a holistic estate plan, alongside instruments such as a will, life insurance, and intergenerational financial plans. When correctly structured and administered, the trust’s value lies in legal and operational continuity, not tax arbitrage.

Conclusion

South African trusts are heavily regulated and taxed, and when considered purely for tax saving, they may fail to deliver the expected benefit or worse, attract penalties and legal challenge. However, when used thoughtfully and for valid estate planning purposes, they remain effective tools, especially for families seeking to preserve wealth and provide for future generations in a structured and protected manner.

Trusts should therefore be implemented as part of a long-term strategic plan rather than a short-term tax tactic. Professional legal and tax advice is essential at all stages, from trust formation through to ongoing administration, to ensure compliance and to realise the intended benefits. This article merely provides an overview of the tax applicable to trust and for more information contact Davids & De Lange for tailored advice for your needs.