Cancelling a loan in your Will
By Fiduciary and Tax Specialist – Chanel Kempff
When an individual transfers assets to a trust, it is done by way of an outright donation of the assets to the trust or by selling the assets to the trust.
When a donation is made, a donations tax liability equal to 20% of the value of the donation, over and above the R100 000 exemption per individual per annum, will become due. Consequently, most persons elect to opt for the latter option by selling the assets to the trust. Generally the trust does not have the funds immediately available to pay for the assets and will owe the purchase price to the individual on loan account. On the demise of that individual the loan account is an asset in his/her estate, which will devolve in terms of the provisions of his/her Last Will and Testament.
Before the introduction of capital gains tax, it was relatively painless to get rid of such an outstanding loan by including a provision in the Will of the individual to the effect that any outstanding loan owed by the trust on date-of-death of the individual is bequeathed back to the trust, effectively cancelling the loan. After the introduction of capital gains tax on 1 October 2001 and until as recently as 28 February 2013 this was no longer possible without giving rise to capital gains tax in terms of paragraph 12(5) of the Eighth Schedule to the Income Tax Act. The application of paragraph 12(5) means that this bequest of the loan will be a deemed disposal for capital gains tax purposes when a debt owed by a person to a creditor has been reduced or discharged by the creditor for no consideration or for a consideration that is less than market value as it is a debt forgiveness. It was consequently common practice to bequeath the outstanding loan to a spouse, a child or a different trust. The loan will then be an asset in the spouse or child’s estate on their death.
Paragraph 12(5) has new been repealed and replaced with Paragraph 12A (effective from 1 March 2013), which in future deals with the position around the reduction or discharge of a debt. Going forward, a bequest of such a loan account in the Last Will and Testament of the creditor will not trigger capital gains tax as a debt forgiveness any more, subject to certain conditions being met.
This change has opened the door to a myriad of constructive planning opportunities with regards to the structuring of loan accounts, of which just one is to cancel the loan debt on death. Consult your Fiduciary and Tax specialist for expert advice if a trust, other entity, person or family member owes you any amount.
This article was taken from Mastermind, the official monthly newsletter of Sanlam Private Investments, a division of Sanlam Ltd – April 2013 Newsletter. Visit the SPI Website