Many South African parents want to help their children settle their bond or get ahead financially. Helping your child settle their home loan can be a life-changing gesture … but if not structured correctly, it can trigger donations tax, affect your estate, and even increase executor’s fees. In this article, we explore two tax-efficient ways to help your child settle their bond:
1. Using the annual donations tax exemption, and
2. Structuring a formal interest-free loan with strategic repayment.
We also unpack how to update your will to avoid estate duty or unintended tax consequences — all while supporting your child when they need it most.
Recently, Margaret and David approached me for advice. Their son, Michael, and his wife own a home with an outstanding mortgage bond of R1.3 million. Margaret and David wanted to know if they could settle the bond on his behalf.
I explained that while their intention is generous, an outright settlement could trigger donations tax, since SARS treats this as a gratuitous donation under the Income Tax Act. This led us to explore two structured, tax-smart approaches:
Option 1: Donate up to R100,000 each per year tax-free; or
Option 2: Loan the money interest-free and forgive it gradually using their donation allowance.
South African tax law (Section 56(2)(b) of the Income Tax Act) allows each individual to donate R100,000 per tax year free from donations tax.
🔹 How it works:
💰 Donations Tax Risk:
⚠️ But Michael Still Pays the Bond Monthly
While this method is clean and compliant, there’s a real-world drawback:
This reduces the immediate benefit. He gets help — but not relief.
✅ Best For:
To help Michael sooner, Margaret and David could loan him the full R1.3 million upfront, enabling him to settle the bond immediately. They would then use their R100,000 per year donations exemption to gradually write off the loan.
But there’s a catch: Section 7C of the Income Tax Act requires that interest-free or low-interest loans to connected persons (such as children) be taxed as if they earned interest at the SARS official rate (currently around 9.75%).
Even if no interest is charged, the “lost” interest is treated as a deemed donation by SARS.
📃 What This Means in Practice:
✅ No donations tax is payable, because the total donation by each person (deemed interest + loan forgiveness) stays within the R100,000 limit
⚠️ What If Deemed Interest Exceeds R100,000?
If the deemed interest alone is more than R100,000 for either donor:
📃 Example: If the deemed interest were R130,000, and only R100,000 was exempt, the extra R30,000 would be taxed at 20% = R6,000 in donations tax.
To avoid this, consider:
Year | Start Balance | Deemed Interest | Donation Exemption Used | Loan Forgiven | New Balance |
1 | R1,300,000 | R126,750 | R126,750 | R73,250 | R1,226,750 |
2 | R1,226,750 | R119,110 | R119,110 | R80,890 | R1,145,860 |
3 | R1,145,860 | R111,720 | R111,720 | R88,280 | R1,057,580 |
4 | R1,057,580 | R103,621 | R103,621 | R96,379 | R961,201 |
5 | R961,201 | R93,720 | R93,720 | R106,280 | R854,921 |
6 | R854,921 | R83,354 | R83,354 | R116,646 | R738,275 |
7 | R738,275 | R71,993 | R71,993 | R128,007 | R610,268 |
8 | R610,268 | R59,500 | R59,500 | R140,500 | R469,768 |
9 | R469,768 | R45,798 | R45,798 | R154,202 | R315,566 |
10 | R315,566 | R30,768 | R30,768 | R169,232 | R146,334 |
11 | R146,334 | R14,262 | R14,262 | R185,738 | R0 |
✔️ Loan settled tax-efficiently over 11 years with no donations tax, assuming SARS interest stays within the R100,000 exemption threshold.
✅ Best For:
Many parents prefer to help their children now, not in their will. This is not just about tax — it’s about values.
“We’d rather help our kids now, when they need it — not after we’re gone.”
Whether your child is buying a first home, raising children, or dealing with high interest rates, strategic support now can be more impactful than an inheritance later.
Further Reading: How to make use of donations effectively to reduce your estate duty liability
If Margaret or David passes away before the loan is repaid, they must address it in their wills — or risk SARS deeming the loan a donation on death.
❌ What Not to Do:
This can result in:
✅ The Better Way:
“I bequeath to my son, Michael, an amount equal to any debt owed to me by him in terms of the loan agreement dated [insert date].”
This:
⚖️ Estate Duty and Executor’s Fees
Unless formally written off, the outstanding loan:
📉 Keeping proper records and loan balances helps manage these costs and ensures your intentions are respected.
While family loans may seem informal, it’s important to consider the National Credit Act 34 of 2005 (NCA).
The NCA generally does not apply to once-off, interest-free loans between natural persons (e.g. a parent and child), but it can apply under certain conditions — particularly if the loan is:
If a loan falls within the scope of the NCA and the lender is not a registered credit provider, the loan agreement may be considered unenforceable, and the borrower may be entitled to certain consumer protections.
💡 Best practice: Always draw up a written loan agreement, and seek advice for large or structured family loans to ensure the arrangement is legally compliant and enforceable.
Further Reading: Critical intergenerational wealth transfer principles to be aware of
Helping your child settle a home loan can change their financial future — but it needs to be done right.
Whether gifting gradually or structuring a recoverable loan, the key is to:
✅ Use donations tax exemptions
✅ Draft proper loan agreements
✅ Update your wills
✅ Track repayments clearly
✅ Understand the estate duty and executor fee consequences
✅ Help now — not just later
📞 Let’s Talk
At Henceforward, we help families structure intergenerational support that’s tax-efficient, legally sound, and emotionally meaningful.
📧 Get in touch to review your options, draft a loan agreement, or update your will with expert advice.
📜 Disclaimer
This article is provided for information and educational purposes only and does not constitute financial, tax, or legal advice. While we’ve taken care to ensure the accuracy of the information, every family’s situation is unique. We strongly recommend consulting a qualified financial planner, tax specialist, or fiduciary advisor before taking any action.
Steven is a CERTIFIED FINANCIAL PLANNER® and co-founder of Henceforward. With over two decades of experience in wealth management, Steven specialises in estate planning and tax-efficient investment strategies. He’s passionate about helping clients align their wealth with their values to create lasting legacies.
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