Last week a reader asked whether she should invest a lump sum for her four-year-old son in his name or hers. Liberty adviser Sheila-Ann Robey suggested the R500,000 should be invested in the reader’s name, and to consider an endowment as well. Other analysts had a different view. Here is that of André Bothma, founder of Tax Maverick:
A simple, interest-free loan agreement between the two parties for R500,000 can be drawn up, writing it off over five years. I say “writing it off” because you can donate R100,000 per tax year to reduce a loan balance. The income derived from this donation will, however, be taxable in the donor’s hands, because the income is earned by a minor — this is due to deeming provisions in section 7 of the Income Tax Act.
Donations tax shouldn’t be a concern, as a loan can be written off using the R100,000 donations tax exemption over a period of five years. This is fairly common practice. The major/minor implication is the deeming provision, which means that whether they keep the money or donate it all now, the income will accrue to the person who invests on behalf of the minor child.unit trusts; both these products are expensive.
I would probably put it into an exchange traded fund with low fees in the child’s name, and the income/capital gains tax earned from the ETF would accrue to me. The tax implications of this deeming provision aren’t steep, as tax on local dividends is only 20% and CGT is maximum 18%, even if you are already in the 45% tax bracket.
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