What is estate pegging in South Africa?

Estate pegging is a tax strategy where you sell a high-growth asset to an Inter Vivos Trust on a loan account. This 'pegs' or freezes the value of the asset in your personal estate at the loan amount, ensuring all future capital growth happens inside the trust, free from your personal 20% estate duty.

What is Section 7C of the Income Tax Act?

Section 7C is an anti-avoidance rule introduced by SARS. If you provide an interest-free or low-interest loan to a trust, SARS treats the 'foregone interest' (the interest you should have charged at the official rate) as a donation, taxing it at 20% annually.

Do trusts pay estate duty when I die?

No. Trusts do not die, so they do not pay estate duty. However, any outstanding loan account that the trust owes to you when you die IS an asset in your personal estate and is subject to the 20% estate duty.

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Trusts, Estate Pegging & Section 7C

Last Updated for the 2026/2027 Tax Year

Key Takeaways for High-Net-Worth Individuals

The Goal: Transfer high-growth assets into a Trust so the future capital appreciation happens completely outside of your personal dutiable estate.
The Loan Account: You usually "sell" the asset to the Trust on credit. This loan account remains an asset in your estate when you die.
The Section 7C Trap: SARS hates interest-free loans to trusts. If you don't charge the trust interest, SARS hits you with an annual 20% Donations Tax on the "foregone interest."

If you are funding a trust, you can now use the increased R150,000 annual Donations Tax exemption introduced in the 2026 Budget to move wealth tax-free.

If your net worth is significantly higher than the R3.5m abatement (or R7m combined spousal abatement), holding high-growth assets in your personal name guarantees a massive tax bill for your heirs. The ultimate solution used by high-net-worth individuals is the Inter Vivos (Living) Trust.

What is Estate Pegging?

Trusts do not die. Therefore, assets owned by a Trust are completely exempt from Estate Duty, Capital Gains Tax upon death, and Executor's Fees.

"Estate Pegging" is the strategic act of moving an asset out of your personal name into a trust. Because the asset is no longer yours, you effectively "peg" or "freeze" the value of your personal estate. All future growth of that asset over the next 10, 20, or 30 years happens inside the trust, completely shielded from your personal Estate Duty.

The Mechanics: Selling to the Trust

You cannot simply "give" a R5 million property to a trust. SARS would immediately hit you with a 20% Donations Tax on the R5 million (costing you R1,000,000 in cash today).

Instead, you sell the asset to the trust. Because the trust usually has no cash, you sell it on a "Loan Account." The trust now legally owns the property, and the trust owes you a debt of R5 million.

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The Loan Account is an Asset This is the critical part: The R5m loan account the trust owes you is an asset in your personal estate. If you die the next day, you still pay 20% Estate Duty on that R5m loan. However, you pay nothing on the future growth of the property.

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Donating the Loan Away You can use your annual Donations Tax exemption to slowly write off or forgive the loan. Over 10 years, you could reduce the loan account by R1.5 million entirely tax-free.

The Section 7C Anti-Avoidance Trap

Historically, founders would sell assets to trusts on interest-free loans. SARS realized this was a massive loophole and introduced Section 7C of the Income Tax Act.

Under Section 7C, if you lend money to a trust and charge no interest (or interest lower than the SARS Official Rate), SARS calculates the "foregone interest" and treats it as an ongoing, annual donation to the trust.

Section 7C Penalty Estimator

Calculate your annual Donations Tax liability if you provide an interest-free loan to your trust.

* Assumes you apply your full R150,000 annual donations exemption to this interest.

Urgent: SARS Trust Compliance Deadline

Are you aware that SARS is instituting recurring monthly penalties (up to R16,000 per month) for trusts that have not submitted their ITR12T returns or Beneficial Ownership registers? This applies even if your trust is dormant.

Run the Free SARS Compliance Check →

What Happens When You Die?

This is where many trust structures fail. When you pass away, the Trust still legally owes your Estate the remaining loan amount. The Executor of your estate is required to call in that debt.

If the trust owes your estate R10m, and the trust has no liquid cash, the Executor might be forced to attach the trust's assets. To prevent this, you have two options in your Will:

Bequeath the Loan: You can leave the loan account to your spouse (exempt under Sec 4q) or your children. The trust now owes them the money instead of you.
Forgive the Loan in your Will: You can state in your Will that the loan to the trust is forgiven upon your death. Warning: While this wipes out the debt, SARS may view the forgiven amount as a dutiable legacy to the trust, meaning your estate will still pay 20% Estate Duty on the forgiven amount.

Comparison: Personal vs. Trust Ownership

Event	Kept in Personal Name	Pegged in a Trust
Asset Growth over 20 years	Grows from R5m to R25m.	Grows from R5m to R25m inside the Trust.
Value for Estate Duty	R25,000,000 (Current Market Value).	R5,000,000 (The frozen loan account, minus any amounts written off).
CGT on Death	Massive CGT on the R20m capital growth.	Zero. The trust doesn't die. No deemed disposal.
Executor's Fees (4.025%)	R1,006,250	R201,250 (Charged only on the remaining loan account).

Scenario: The R10m Property Portfolio

The Situation: David (age 50) owns a commercial property worth R10m. He expects it to grow to R30m by the time he dies at age 80. He decides to peg the estate by selling it to a Trust on loan.

Step 1: The Transfer (CGT Trigger)

David cannot move the property for free. He must pay Capital Gains Tax now on the growth he has already made, and he must pay Transfer Duty to move the property into the Trust's name. This requires upfront cash.

Step 2: Section 7C Management

David now has a R10m loan account. To avoid the annual Section 7C donations tax, the trust actually pays David interest at the official rate. The trust uses the rental income from the property to pay this interest to David.

The Verdict 30 Years Later:
David dies. The property is worth R30 million. David's dutiable estate is only the remaining R10m loan account. He saved his heirs from paying 20% Estate Duty on R20,000,000 of growth (a R4,000,000 saving), completely avoiding the Executor's liquidity trap.

Pro Tip: Use Growth Assets, Not Dead Assets
Because of Section 7C and the upfront CGT costs of transferring an asset, you should never put a stagnant asset (like a primary residence that isn't growing much) into a trust. Estate pegging is only mathematically viable for high-growth assets (like stock portfolios or commercial real estate) where the future tax savings massively outweigh the current setup costs.

This guide is provided for educational purposes by the team at Cape Town Lawyer. Setting up an Inter Vivos trust and managing Section 7C compliance requires specialist accounting and legal advice. Never execute an estate pegging strategy without a registered fiduciary practitioner.

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