Two further options for investing a nest egg for your child — totally tax free.
A few weeks ago, we featured a letter in which a reader asked what she could do with an inheritance for her four-year-old son. Put R500,000 into a unit trust in his name now, or open a unit trust in her own name with the intention of giving it to him when he turns 21? The reader also wanted to know whether to feed the money into a unit trust over time, bearing in mind the annual donations tax on any amount over R100,000. We have one last say on the matter.
The reader is correct in that any donation of more than R100,000 a year attracts tax at 20%, payable by the person making the donation. There is, however, no donations tax between married partners, so you could donate half to your spouse, if married, and then each could donate R100,000 a year to your child until you’ve donated R250,000 each, totalling R500,000.
But there is another option if you want to donate the money to your child now. You could make a R500,000 interest-free loan to them and they could invest the money immediately.Having loaned the R500,000, each year for the next five years you can make a R100,000 donation tax free to your child, offsetting the R500,000 interest-free loan. After five years, it would all be cleared.
You could speed up the process by doing it in conjunction with your spouse, each making a R250,000 loan that will be paid off with donations. Importantly, keep records, starting with an interest-free loan agreement, then the annual donation and paying down of the loan. These records don’t need to be fancy, just documents recording the process every year for your records.
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