No escape from ABSD (Trust) with 35% tax on residential prop transfer
No escape from ABSD (Trust) with 35% tax on residential prop transfer. The Ministry of Finance (MOF) declared at 11.30 p.m. on Sunday, May 8, that any transfer of residential property into a living trust will be subject to an additional buyer’s stamp duty (ABSD) of 35 percent beginning the following day, May 9. It felt like deja vu when the newest set of property cooling measures was revealed minutes before midnight on December 15 of last year.
On May 9, MOF declared that transfers of equity interests in property-holding entities (PHEs) into trusts will be subject to extra conveyance duties (ACD). Even if there is no identifiable beneficial owner at the time of the transfer into the trust, ABSD and ACD will apply.
According to Norman Ho, senior partner, corporate real estate at Rajah & Tann Singapore, 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.” “It explains how the trust’s assets will be distributed after the original owner passes away.”
At first look, it appears that the government is attempting to close a loophole in residential property acquisition through trust structures. “Some families purchase property through trust arrangements for a number of reasons,” says Karamjit Singh, CEO of Delasa, a real estate investment sales consultant. According to Singh, a simple trust structure entails a parent or grandparent purchasing a residence for the benefit of a minor kid or grandchild. “Because banks would not lend to a minor (under the age of 21), the trustee will have to purchase in cash, thereby delivering the funds to the recipient.”
According to Lee Liat Yeang, senior partner at Dentons Rodyk’s corporate real estate practice group, these trusts are often founded for children under the age of 21 (minors), who are likely not liable to pay ABSD if they are Singapore citizens and do not own a residential property.
‘Complementary’ to cooling measures
The recent modification in ABSD and ACD imposed on residential property transfers to trusts, according to Lee, is not a property market cooling strategy, “although it is complementary.” “Only the cash-rich would be able to purchase residential property for their children under a trust because they would not be able to use that property to obtain mortgage financing.”
Following the property market cooling measures in December, there was an increase in queries regarding buying residential property through a trust structure, but “it was not particularly significant,” says Jennifer Chia, partner, corporate at TSMP Law Corp. The main obstacles that dampened interest in such structures, according to Chia, were not being able to acquire finance for the residential property acquisition and having to give up control and beneficial interest in the property.
“These trusts are generally utilized by parents who want to give their children an advanced inheritance of residential property like AMO Residence, especially if they are younger children, rather than waiting until they die to transfer these assets,” she says. “These could also be charity trusts formed for benevolent reasons (whether for medical, educational, or religious advancement) where the trustee determines the beneficiaries.”
Closing the loophole on ‘unidentifiable beneficiary’
The 35 percent ABSD could be partially or totally repaid under the new laws if specific circumstances were met. “Before the new laws, if the beneficial owners of a trust were not identified, ABSD would not be charged,” Chia continues. ABSD may still be charged if “the beneficial owners were identified, even before May 9,” she says, “depending on the profile of these beneficial owners.”
For example, if an identified beneficiary currently owns a home in Singapore, the transfer to the trust would be subject to both BSD and ABSD, which is 17 percent. From December 16 of last year, any beneficiary who is an entity acquiring any residential property under the trust will be liable to a 35 percent ABSD.
The beneficiary’s name is usually explicitly mentioned in the trust instrument, and the transfer of beneficial interest to the kid is unconditional, according to Chia. In these circumstances, the trustee would still be required to pay ABSD (Trust) of 35 percent of the purchase price upon exercise of the option to purchase before requesting a re-fund, according to the new guidelines.
‘Little impact on wider residential market’
According to Singh, trust transactions with such terms are uncommon. As a result, he believes ABSD (Trust) will have little impact on the overall home market. ABSD (Trust), according to Rajah and Tann’s Ho, will have “practically no influence” on the overall housing market and impending residential property launches such as AMO Residence. The upfront 35 percent ABSD charge associated with employing such living trusts will make residential property purchases less appealing. According to Ho, there is no clear schedule for the ABSD reimbursement.
According to Lee Sze Teck, senior director of research at Huttons Asia, trusts are set up as a vehicle for estate planning, and the new ABSD (Trust) does not affect that. “It can be viewed as a sort of wealth tax aimed at achieving greater equity.”
Many rich people, according to Lee, are interested in purchasing property for their children as part of their estate planning. As a result, we’re seeing more family offices spring up in Singapore. Even the current regulatory change, he argues, is unlikely to stop the tide. The gap between currencies and deposits compared to mortgage loans has increased to 2.13 in 4Q2021, he adds, indicating that liquidity in the real estate market has grown at a quicker rate.
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