The truth about donating property in South Africa

What counts as a donation?

South African law defines a donation as the free or “gratuitous” disposal of property, including the transfer of ownership or the waiver of a right without receiving anything in return (section 55(1) of the Income Tax Act 58 of 1962). If the person receiving the property gives any form of payment or exchange, the transaction is no longer classified as a donation.

Donation tax: The biggest financial impact

The most significant cost associated with donating property is donation tax, which is payable by the donor (the person giving the property). According to section 64(1) of the Income Tax Act 58 of 1962, South African tax residents are taxed at:

20% of the value of the property, and
25% of the value of the property when donations exceed R30 million

Although individuals are allowed to donate up to R100 000 per year tax-free, this allowance does little to reduce the burden when transferring high-value property. Donation tax becomes effective once all legal formalities are fulfilled (s 55(3) of the Income Tax Act 58 of 1962). For immovable property, this requires a written deed of donation and the registration of the property in the relevant Deeds Office.

Discounted sales still trigger donation tax

Selling a property at a reduced price does not necessarily help you avoid donation tax.

Section 58(1) of the Income Tax Act 58 of 1962 states that where property is transferred for inadequate consideration (far below market value), the difference between the fair market value and the purchase price is treated as a donation.

Therefore, where a parent sells their home which is generally worth R 2 500 000 to a child for reduced price of R 1 000 000, they would still have to face donation tax on the R 1 500 000 shortfall. This would result in the parent being liable to pay R 280 000 to SARS for said donation tax. In addition, SARS also calculates transfer duty and capital gains tax using the market value, not the discounted selling price. This means that “cheap family sales” can become financially risky.

Limited exemptions

Some donations are exempt from donation tax, including those made between spouses and to certain public or government organisations (section 56(1)). However, most property donations between family members, like our example of parents donating a home to their children, are fully taxable.

Conclusion

Although donating property may seem generous or financially strategic, it often turns out to be more expensive and more complicated than expected. In many cases, it may be cheaper and simpler to sell the property at market value or transfer it through a will.

Anyone considering a property donation should seek professional conveyancing and tax advice to avoid costly and unintended consequences.

This article is intended for general information purposes only and does not constitute legal advice

Article by: Jasmine Jacobs (LLB) – Candidate Attorney