Last Updated on 03/07/2025 by Carl-Peter Lehmann
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.
A Real-World Scenario for helping your child settle their home loan
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.
Option 1: Annual Donations (R100,000 Per Person Per Year)
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:
- Margaret donates R100,000 annually to Michael.
- David does the same.
- Michael receives R200,000 each year to reduce his bond.
💰 Donations Tax Risk:
- A once-off donation of R1.3 million triggers R220,000 in donations tax (R1.1m × 20%) if not structured.
- Staying within the R100k limit avoids this entirely.
⚠️ But Michael Still Pays the Bond Monthly
While this method is clean and compliant, there’s a real-world drawback:
- Michael must continue making monthly bond repayments (interest + capital) during the 6.5 years it takes to receive R1.3 million.
This reduces the immediate benefit. He gets help — but not relief.
✅ Best For:
- Families where the bond is affordable.
- A simple, long-term wealth transfer strategy.
- Parents who want minimal admin or legal complexity.
Option 2: Interest-Free Loan with Annual Forgiveness
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:
- On a R1.3 million loan, deemed interest = R126,750
- This is treated as a donation by the lenders (Margaret and David)
- Each uses R63,375 of their R100,000 annual exemption to cover the deemed donation
- The remaining R36,625 each is applied to reduce the capital on the loan
✅ 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:
- The excess will be treated as a taxable donation and may attract 20% donations tax.
📃 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:
- Reducing the loan amount,
- Charging at least the SARS official interest rate (which would result in income tax instead of donations tax), or
- Structuring the arrangement under professional guidance.
📊 Loan Write-Off Example:
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:
- Parents wanting to give immediate bond relief.
- Families who don’t mind tracking a formal loan.
- Long-term estate planning — the loan remains an asset in the estate.
Helping While You’re Alive: A Powerful Principle
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
Wills and Loans: Avoiding Donations Tax and Estate Duty
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:
- Don’t stay silent on the loan in your will.
- Don’t just “forgive the loan” with no explanation.
This can result in:
- Deemed donations tax
- Estate duty exposure
- Disputes among heirs
✅ 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:
- Avoids donations tax,
- Preserves fairness between heirs,
- Acknowledges the loan as an asset in the estate.
⚖️ Estate Duty and Executor’s Fees
Unless formally written off, the outstanding loan:
- Forms part of the dutiable estate, and
- Is subject to executor’s fees (typically 3.5% + VAT of gross assets)
📉 Keeping proper records and loan balances helps manage these costs and ensures your intentions are respected.
💬 Frequently Asked Questions on helping your child settle their homeloan
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1. Is helping my child settle their bond considered a donation?
Yes — unless structured correctly, it may attract donations tax.
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2. What is the donations tax rate?
20% on amounts above R100,000 per donor, per year.
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3. Can I forgive a loan in my will?
Yes, but if you don’t handle it properly, it may be seen as a donation. Rather bequeath an amount equal to the debt.
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4. Will the loan affect estate duty?
Yes — any outstanding loan is included in the estate value and can increase executor’s fees.
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5. Can I just gift the full amount in one go?
You can — but expect 20% donations tax on everything above R100,000 per person.
📌 Legal Note on Family Loans and the National Credit Act
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:
- Interest-bearing,
- Over R500,000, or
- Part of a pattern of lending that could be considered a business practice.
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
Final Thoughts: Helping your child settle their homeloan
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 Hall
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.
