At Henceforward, part of our role is to scan the financial landscape, identify changes before they take effect, and help our clients adjust with confidence. On 16 August 2025, National Treasury and SARS released the Draft Taxation Laws Amendment Bill (TLAB). While technical in nature, one of the most important proposals could reshape a long-standing investment tool in South Africa: preference shares.
For decades, preference shares have been used by companies, families, and investors as a bridge between debt and equity, offering steady income streams while enjoying favourable tax treatment. With the proposed amendments, however, much of the appeal of preference shares could disappear.
Since this article was first published, South Africa’s National Treasury has retracted its proposed amendment to the definition of “hybrid equity instruments” under Section 8E of the Income Tax Act.
The draft change .. which would have aligned the tax treatment of preference shares with IFRS liability classification and potentially reclassified many dividends as taxable income … has been withdrawn following strong industry pushback. For now, the existing three-year redemption rule remains in place.
However, investors and issuers should note that other proposed amendments in the 2025 Draft Taxation Laws Amendment Bill (TLAB) remain active, including:
📌 Implication: The withdrawal provides temporary relief and clarity for preference share funding structures, but the policy environment remains fluid.
Businesses, investors, and financial planners should continue to track Treasury’s updates as the consultation period (closing 12 September 2025) may still bring refinements.
Preference shares sometimes simply called “prefs,” sit somewhere between a loan and an ordinary share. Like a loan, they usually pay a fixed return in the form of dividends, making them predictable and bond-like. Like a share, they represent ownership in the company, but they typically carry no voting rights and can sometimes be bought back (or “redeemed”) by the company at a future date.
This hybrid nature gave preference shares a special status. They behaved like debt but were taxed like equity. For investors, that meant predictable income taxed at just 20% dividends tax, instead of being taxed at their marginal income tax rate of up to 45% as interest from bonds would be. For companies, preference shares were a way to raise funding without taking on conventional debt and without diluting control through issuing ordinary shares.
The combination of steady income and lighter tax made preference shares a favourite among high-income investors. They also proved useful for corporate and family planning. Companies used them to raise capital flexibly, while families and entrepreneurs employed them in estate planning and BEE transactions to transfer value tax-efficiently.
South African banks like FirstRand, Standard Bank, and Nedbank also issued listed preference shares. These found a ready market with investors who valued stable, bond-like returns but appreciated the lower tax burden. For many years, preference shares offered what seemed like the best of both worlds.
Further reading: Important investment advice for retirees in South Africa today
To understand why preference shares have drawn so much attention from Treasury, it helps to contrast how debt and equity are taxed.
When a company issues debt, such as a bond or loan, the interest it pays is deductible for tax purposes, which reduces its taxable income. The investor, however, pays income tax on that interest, sometimes at the top rate of 45%. In contrast, ordinary shares do not allow companies to deduct dividends, but investors benefit because dividends are exempt from further income tax, with only a flat 20% dividends withholding tax applied.
Preference shares blurred this distinction. Although they behaved like debt by paying fixed returns, they were taxed like equity because those returns were classified as dividends. This mismatch created a tax advantage that the new rules are now seeking to close.
The Draft TLAB makes three important changes. First, if a preference share is treated as debt in a company’s financial statements under IFRS, it will now also be taxed as debt. Second, any dividend declared within ninety days of redemption or buy-back will be taxed as income rather than as a dividend, closing a timing loophole. Finally, the anti-avoidance provisions in Section 8E of the Income Tax Act will be expanded to catch more hybrid instruments that look like equity on paper but act like debt in substance.
Taken together, these changes would strip away much of the tax efficiency that made preference shares attractive in the first place.
Consider an investor who currently earns R500,000 a year in preference share dividends. Today, they would pay R100,000 in dividends tax and keep R400,000 after tax. Under the new proposals, if those dividends are reclassified as income, they could pay as much as R225,000 in income tax at the top marginal rate, leaving just R275,000.
That is a R125,000 drop in annual after-tax income on the same investment, purely because of the change in tax treatment. For clients relying on these instruments for steady income, the difference is substantial.
If preference shares lose their shine, where can investors turn? One alternative is ordinary shares, which, although less predictable, offer the potential for dividend growth and capital appreciation. To see the difference clearly, let’s compare Standard Bank’s preference shares with its ordinary shares.
Over the past 15 years, Standard Bank preference share dividends have been directly tied to the interest rate cycle. As the chart below shows, distributions swung between R10.50 and R5.50 per share, moving up when prime rates were high and falling when they were cut. Investors enjoyed income that behaved like fixed interest — stable at times but entirely dependent on movements in interest rates rather than company growth.
Now compare that to Standard Bank’s ordinary shares. In early 2015, the share price was around R135, and the dividend was R5.59 per share (a yield of roughly 4.15%). Fast forward ten years, and the share price has grown to around R250, while dividends have increased almost threefold to R15.80 per share. For an investor who bought in at R135, that means the effective yield on their original purchase has risen to an impressive 11.7%, alongside significant capital growth.
The contrast is striking. Preference shares provided steady but rate-dependent income, with little scope for compounding growth. Ordinary shares, while more volatile in the short term, rewarded patient investors with both capital appreciation and rising dividend income that comfortably outpaced inflation.
Bonds still play a role for stability, but their interest is fully taxable, which reduces after-tax returns for high-income investors. Taken together, both the legislative changes and the long-term market evidence suggest that investors may need to reweight away from preference shares and toward ordinary shares or diversified strategies that balance growth and income.
Further reading: Some of our best share ideas for long-term investment
At Henceforward, we don’t wait for the law to change before taking action. By actively scanning draft legislation like the 2025 TLAB, we can anticipate the impact on our clients’ portfolios and planning structures. For investors, this means understanding how after-tax returns might shrink under the new rules and evaluating whether ordinary shares, bonds, or other instruments could provide better long-term outcomes. For families and businesses, it means reviewing estate and succession structures that previously relied on preference shares and ensuring they still deliver the intended results.
The Draft TLAB proposals mark a turning point for preference shares in South Africa. What was once a reliable, tax-efficient bridge between debt and equity is now under pressure. Investors face the prospect of much lower after-tax income, and planners will need to rethink structures that previously relied on preference shares for efficiency.
While this may feel like the end of an era, it also creates an opportunity to rebalance portfolios toward alternatives that can deliver sustainable, long-term growth. At Henceforward, we are already analysing the details, running the numbers, and preparing strategies so our clients are never caught off guard.
If your share portfolio exceeds R20 million, ensuring it is managed with precision, efficiency, and alignment to your family’s goals becomes essential. At Henceforward, we take a holistic approach that goes beyond investment selection. We focus on protecting your wealth, optimising tax outcomes, and building strategies that sustain and grow your legacy across generations.
We partner with families who want more than just returns — families who want clarity, control, and confidence that their wealth is working for them in the right way.
Get in touch with us today to explore how we can add measurable value to your portfolio and secure your financial future.
Founding Partner & Director at Henceforward
CERTIFIED FINANCIAL PLANNER® with over 20 years of experience advising successful families, entrepreneurs, and business owners on building, protecting, and transitioning their wealth across generations.
