Family loans – beware the pitfalls 

Why you must record loans between parents and children or family members — or risk a tax nightmare 

In many South African families, it has become common for parents to assist their children financially, either to buy a first home, start a business, or bridge a difficult financial situation. These are financial transactions and are often informal, undocumented, and made in the spirit of goodwill.  

However, tax authorities are becoming more and more aware of these transactions and one must be aware that if SARS steps in, that “helping hand” may be seen or assessed to be a donation — with serious tax consequences, especially if the transaction happened some time ago. 

With tax authorities tightening their scrutiny on inter-family financial transactions, especially during the administration of deceased estates, failure to document loans properly can result in donations tax, interest, penalties, and significant delays in estate finalisation. 

Tax collection systems are becoming more sophisticated. With enhanced third-party reporting, AI-driven audit triggers, and cross-referenced data, no financial transaction is too small or too private to escape scrutiny. 

In a digitised and data-driven environment, informal financial dealings within families are no longer invisible. Auditors are increasingly reviewing deceased estates for potential donations disguised as loans. 

What the law says: donations and “loans” 

Under the Income Tax Act 58 of 1962, section 55(1) (ii) defines a donation as “any gratuitous disposal of property including any gratuitous waiver or renunciation of a right”. 

If a parent or grandparent (or any family member for that matter) gives or “lends” money to a child or family member without proper documentation to prove it is a loan, the taxman may argue that this is in substance, a donation. 

• Section 56(2)(a) of the Act provides for an annual exemption of R100,000 per individual per tax year. 

• Any amount exceeding this is taxed at 20% (or 25% above R30 million in cumulative donations). 

Key risk: In the absence of a signed loan agreement and evidence of repayments, the taxman may reclassify the amount as a donation. 

Example: A family home loan gone wrong 

Consider this scenario: 

A mother “lends” her daughter R1.5 million to buy a home. There is no agreement, no repayment schedule, and no mention of interest. The daughter makes no repayments. Years later, the mother dies. 

During estate administration, the executor discovers this undocumented transfer due to a notification and request from the taxman who has had the transaction flagged for years due to a background lifestyle audit that they have had pending on the daughter’s finances. Neither the executor nor the family or daughter can substantiate the claim that it was a loan, and thus the taxman reviews the transaction and deems it was a donation under section 55, and not a loan. The result? 

• R1.4 million of the loan exceeds the annual exemption of R100,000 

• Donations tax at 20% = R280,000 is levied at the date of the transaction 

• Penalties and interest are also added, as it was not disclosed on prior tax returns. 

To make matters worse: 

1. The estate does not have the liquidity to pay the liability to SARS. 

3. SARS withholds the estate compliance certificate until the issue is resolved, delaying distribution to beneficiaries. 

2. The Executor cannot finalise the estate unless something is sold, which goes against the estate planning that was done for the mother. 

Risks during deceased estate administration 

When a person passes away, their executor must account for all assets and liabilities in the estate. If a loan to a child: 

• Is not recorded as an asset, or 

• Was never repaid, or 

• Has no loan agreement to back it up, 

the taxman can reclassify it as a donation and assess donations tax, under-declaration penalties, and interest. Executors may also face liability if they incorrectly exclude such amounts from the estate. 

In some cases, disputes may arise between heirs, especially if one child received a large undocumented “loan” and others feel prejudiced. 

How to protect yourself and your family 

Here is how to ensure your financial assistance is recognised as a loan and not a donation: 

1. Draft a written loan agreement 

• Include loan amount, repayment terms, and any applicable interest , and signature by both parties. 

• Date the agreement and retain a copy in your personal records. 

• Important: make sure that the loan can be called up or payable on demand just in case the status of your family member changes as in marriage or divorce, or their financial position changes. 

2. Record repayments 

• Avoid cash repayments and rather use bank transfers and note them as repayments. 

• Retain a statement or ledger of instalments made and received. 

• If any annual R100,000 donations tax free deductions are allowed by the lender, record those too.  

3. Reflect the loan in your estate planning 

• List the loan in your will as owing, and deal with it as an asset to be bequeathed to someone (e.g. the person that owes it) rather than as a claim to be written off. 

• List it in your estate summary or include it in your personal balance sheet or wealth register. 

4. Inform your executor and family 

• Executors must be aware of the loan to report it correctly. 

• Transparency with family avoids disputes and surprises later. 

In conclusion, helping your children or other family members financially is noble – but do not let your generosity become a burden on your estate. What starts as a family favour can quickly become a SARS audit, a legal dispute, or an expensive delay. 

In the current tax environment, inaction is not innocence – and a lack of paperwork may cost your estate far more than the loan itself.