No escape from ABSD with 35% tax on residential property transfer into a living trust
By Timothy Tay
/ EdgeProp Singapore |
These trusts are typically used by parents who want to give an advanced inheritance of residential property to their children, especially if these are minor children, instead of waiting to transfer these assets upon death, according to Jennifer Chia of TSMP Law Corp (Photo: Samuel Isaac Chua/EdgeProp Singapore)
SINGAPORE (EDGEPROP) - The Ministry of Finance (MOF) announced at 11.30pm on Sunday, May 8, that additional buyer’s stamp duty (ABSD) of 35% will apply to any transfer of residential property into a living trust with effect from May 9, the next day. It was like déjà vu as the latest round of property cooling measures were also announced minutes before midnight on Dec 15 last year.
The following evening on May 9, MOF announced that additional conveyance duties (ACD) will apply to transfers of equity interests in property-holding entities (PHEs) into trusts. Both ABSD and ACD will apply even if there is no identifiable beneficial owner at the time of the transfer into the trust.
A living trust is “a legal document or a trust, created during an individual’s lifetime (the trustor or grantor) where a designated person, for example the trustee, is given responsibility for managing that individual’s assets for the benefit of the eventual beneficiary,” says Norman Ho, senior partner, corporate real estate at Rajah & Tann Singapore. “It spells out how to distribute what’s in the trust after the original owner dies.”
At first glance, it would appear that the government is trying to plug a loophole in the acquisition of residential properties under such trust structures. “Some families purchase homes under trust structures for a variety of reasons, mainly driven to avoid ABSD or to pay lower ABSD rates legitimately,” says Karamjit Singh, CEO of Delasa, a real estate investment sales consultancy.
A plain vanilla trust structure involves a parent or grandparent buying a home for the benefit of a child or grandchild who could be a minor, explains Singh. “Because banks cannot lend to a minor (under the age of 21), the trustee would need to purchase in cash, and in effect, is irrevocably giving the sums of money to the beneficiary.”
These trusts are typically created for children under the age of 21 (minors) as they are probably not liable to pay ABSD if they are Singapore citizens and do not own a residential property, observes Lee Liat Yeang, senior partner at Dentons Rodyk’s corporate real estate practice group.
Norman Ho of Rajah and Tann believes ABSD (Trust) will have “practically no effect” on the wider housing market and the upcoming residential property launches (Photo: Samuel Isaac Chua/EdgeProp Singapore)
‘Complementary’ to cooling measures
Lee does not regard the latest change in ABSD and ACD imposed on residential property transfers to trusts as a property market cooling measure, “although it is complementary”, he says. “Only the cash-rich would be able to purchase residential property under a trust for children as they would not be able to use that property to obtain mortgage financing for the purchase.”
While there was a spike in inquiries about buying residential property via a trust structure following the property market cooling measures in December, “it was not particularly significant,” says Jennifer Chia, partner, corporate at TSMP Law Corp.
Instead, not being able to obtain financing for the residential property purchase and having to give up control and beneficial interest in the property were the main limitations that dampened interest in such structures, notes Chia.
“These trusts are typically used by parents who want to give an advanced inheritance of residential property to their children, especially if these are minor children, instead of waiting to transfer these assets upon death,” she adds. “These could also be trusts established for charitable purposes (whether for medical, educational or religious advancement) where the determination of the beneficiaries is left at the discretion of the trustee.”
Only the cash rich would be able to purchase residential property under a trust for children as they would not be able to use that property to obtain mortgage financing for the purchase, says Lee Liat Yeang of Dentons Rodyk (Photo: Samuel Isaac Chua/EdgeProp Singapore)
Closing the loophole on ‘unidentifiable beneficiary’
Under the new rules, if certain conditions were met, the 35% ABSD could be partially or fully refunded. “Before the new rules, ABSD would not be payable if the beneficial owners under a trust were not identifiable,” continues Chia. On the other hand, if “the beneficial owners were identifiable, even before May 9, ABSD could still be payable, depending on the profile of these beneficial owners”, she adds
For example, if an identifiable beneficiary already owns a residential property in Singapore, the transfer to the trust would be subject to both buyer’s stamp duty (BSD) and 17% ABSD. A beneficiary who is an entity acquiring any residential property under the trust would be subject to ABSD of 35% from Dec 16 last year.
In most such cases, the name of the beneficiary is clearly identified in the trust document and the transfer of beneficial interest to the child is unconditional, says Chia. In these cases, under the new rules, the trustee would still need to pay ABSD (Trust) of 35% of the purchase price upon exercise of the option to purchase before seeking a re- fund, she adds.
Some families purchase homes under trust structures for a variety of reasons, mainly driven to avoid ABSD or to pay lower ABSD rates legitimately, according to Karamjit Singh of Delasa (Photo: Samuel Isaac Chua/EdgeProp Singapore)
A matter of cash flow, not cost
“The impact of ABSD (Trust) on most typical purchases by trusts tends to be a cash flow issue, not a cost issue,” says Delasa’s Singh. “Bearing in mind that such trust purchases are usually made by well-heeled families paying fully in cash, the cash flow of 35% may not be too much of a deterrent, as the savings of ABSD tends to be significant.”
At times, a trust deed may be structured in a manner where the beneficiary needs to fulfil certain conditions, such as getting married by a certain age, turning 21 or graduating from university, and others, before being entitled to the interest in the property, says Singh. Alternatively, the purchase could be made with a grandparent as beneficiary, but on condition that the property is willed back to the trustee who is funding the purchase, he adds.
“In the eyes of the Inland Revenue Authority of Singapore [IRAS], because of the unfulfilled conditions attached to it, the beneficiary is not regarded as identifiable,” continues Singh. “In these cases, the trustee would not be entitled to the refund of ABSD Trust paid. ABSD (Trust) hence closes the loophole for such purchases.”
Property prices in Singapore have trended upwards over time, increasing by 1,864% over the past 47 years, according to Huttons Research (Photo: Samuel Isaac Chua/EdgeProp Singapore)
‘Little impact on wider residential market’
Such trust purchases made with such conditions attached are uncommon, adds Singh. Thus, ABSD (Trust) is not expected to have much of an impact on the wider residential market, he says. Rajah and Tann’s Ho also believes ABSD (Trust) will have “practically no effect” on the wider housing market and the upcoming residential property launches.
The upfront 35% ABSD payment on using such living trusts will make it less attractive to make residential property purchases under such structures. There is also no clear timeline for the ABSD refund, adds Ho.
Trusts are set up as a vehicle for estate planning and the new ABSD (Trust) does not change that, says Lee Sze Teck, senior director of research, Huttons Asia. “It can be seen as a form of wealth tax and to make things more equitable.”
No doubt, many wealthy individuals are interested in buying property for their children for estate planning purposes, adds Lee. Hence, we see more family offices being set up in Singapore. Even the recent change in rules is not likely to stem the tide, he adds. It is also clear that liquidity in the real estate market has grown at a faster rate: As of 4Q2021, the gap between currency and deposits relative to mortgage loans has widened to 2.13, he adds.
Nicholas Mak of ERA Realty estimates that less than 10% of private homebuyers use living trusts to purchase residential property (Photo: Samuel Isaac Chua/EdgeProp Singapore)
Still attractive
Living trusts are usually used by high net worth individuals to acquire or transfer very expensive real estate. These transactions are already a small minority among the tens of thousands of private housing units transacted each year, reckons Nicholas Mak, ERA Realty head of research and consultancy. He estimates that less than 10% of private homebuyers use living trusts to purchase residential property.
Most of the people who use living trusts to buy properties would put a Singaporean family member as the beneficiary of the trust, adds Mak. Since the net impact on these users is neutral because they can apply to IRAS for a refund of ABSD (Trust), such practice will likely continue.
Indeed, transferring residential real estate to a living trust would still be attractive for those who have the means, says Chia of TSMP. However, they will have to pay 139% of the purchase price upfront — including about 4% BSD and 35% ABSD, she estimates.
If they meet certain conditions, for instance, if the beneficiary is identifiable as a Singapore citizen with no prior Singapore residential properties, the ABSD refund will be in full at the end of the day, says Chia.
Property prices in Singapore have trend- ed upwards over time, increasing by 1,864% over the past 47 years, according to Huttons research.
“Singapore is widely regarded as a safe haven and first choice for investment among locals and foreigners hence more monies may flow into properties in the coming months,” says Huttons’ Lee
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