Is residential property purchase affected by ABSD on living trusts?

How does the new rules announced by the Ministry of Finance affect residential property purchase? Or is it too insignificant to impact the property market and your home purchase?

residential property purchase
Image credit: harry b/Flickr

The Ministry of Finance (MOF) announced on 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. Both ABSD and additional conveyance duties (ACD) will apply even if there is no identifiable beneficial owner at the time of the transfer into the trust.

Some families do residential property purchase under trust structures for a variety of reasons, mainly driven to avoid ABSD or to pay lower ABSD rates legitimately.

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.

“It is unlikely that the latest change in ABSD and ACD imposed on residential property transfers to trusts is a property market cooling measure but it compliments the Government efforts to prevent a bubble from forming in the property market,” said Paul Ho chief officer at iCompareLoan.

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. As such, the impact on the residential property market is insignificant.

Only the cash rich would be able to do residential property purchase under a trust for children as they would not be able to use that property to obtain mortgage financing for the purchase.

Before the new rules, ABSD would not be payable if the beneficial owners under a trust who were not identifiable, Now, an identifiable beneficiary already who owns a residential property in Singapore, the transfer to the trust would be subject to both buyer`s stamp duty (BSD) and 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.

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.

Some families purchase homes under trust structures for a variety of reasons, mainly driven to avoid ABSD or to pay lower ABSD rates legitimately. 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. This is what the new rules address.

“In a turbulent world, Singapore is a safe haven. Which is why investors prefer to park their money here and the residential property prices here have increased by 1,864% over the past 47 years. This is even more reason to invest in properties. While we welcome that we cannot allow a bubble to form here as it will disadvantage the locals,” said Mr Ho.

For Singapore Citizens, as far as Stamp Duty treatment is concerned, there is little to worry about residential property purchase as there is no ABSD on their first residential property.

What is ABSD?

ABSD is a property tax that’s levied on top of Buyer’s Stamp Duty (a tax that property buyers have to pay when they buy a property), and it’s computed based on the valuation or the selling price of the property, whichever is higher.  Liable buyers are required to pay ABSD on top of the existing Buyer’s Stamp Duty (BSD). ABSD and BSD are computed on the purchase price as stated in the dutiable document or the market value of the property (whichever is the higher amount).

How Do You Calculate ABSD?

For instance, say if a property is valued at $1 million but the selling price is $1.1 million. Assuming that you’re subjected to 12% ABSD, the ABSD amount that you’ll need to pay is $1.1 million X 12% = $132,000.

Who Needs to Pay ABSD? 

ABSD applies to the following group of buyers:

  • Singapore Citizens: ABSD will be levied on the second (17%) and subsequent (25%) property purchases
  • Singapore Permanent Residents (PRs): ABSD will be levied on all purchases. The first purchase will be 5% while the second purchase will be 25%, and third and subsequent purchases will be 30%.
  • Foreigners: 30% ABSD for any property purchase 
  • Entities (companies or associations): 35% for each property (plus additional 5% non-remittable ABSD for developers)
stamp duty treatment
source: IRAS

As a result of Free Trade Agreements signed by the Singapore Government, nationals and permanent residents of these five countries are accorded the same property Stamp Duty treatment as Singapore Citizens. The Free Trade Agreements signed with the United States of America and the European Free Trade Association (EFTA), provides these exemptions to the residents of these countries.

Those who are able to enjoy this remission of ABSD are:

  1. Nationals of the United States of America; and
  2. Nationals and Permanent Residents of Iceland, Liechtenstein, Norway or Switzerland

This means that if you are a citizen of Iceland, Liechtenstein, Norway, Switzerland or United States of America, instead of paying an additional 30% for the ABSD, you do not need to pay any ABSD at all on your first residential property purchase in Singapore. And the ABSD would be 17% for your second residential property and 25% for your third and subsequent properties.

This applies to only private non-landed residential properties, as foreigners are not allowed to purchase and own land in Singapore with the only exception being the luxurious water-front bungalows on Sentosa Cove.

Foreign investors who are eligible can submit an application of remission through their legal representative who can manage their stump duty treatment and transactions with the Inland Revenue Authority of Singapore (IRAS) on your behalf.

The ABSD liability will depend on the profile of the buyer as at the date of purchase or acquisition of the residential property:
A. Whether the buyer is an individual or an entity
B. The profile of the buyer and
C. The count of residential properties owned by the buyer

Is the Buyer an Individual or an Entity matters for Stamp Duty treatment

An entity means a person who is not an individual. It includes the following:

  • An unincorporated association
  • A trustee for a collective investment scheme when acting in that capacity
  • A trustee-manager for a business trust when acting in that capacity
  • The partners of the partnership whether or not any of them is an individual, where the property conveyed, transferred or assigned is to be held as partnership property

If a property is jointly purchased by buyers of different profiles, the profile with the highest ABSD rate will apply on the entire value purchased.

If A purchases a residential property to be held on trust for the beneficial owner B, ABSD is charged based on the profile of the beneficial owner, B.

Profile of the Buyer

The applicable ABSD rate is based on the profile of the home buyer on the date of purchase. You must have been granted the Singapore Citizenship status or Singapore Permanent Resident status by the Immigration and Checkpoint Authority (ICA) as at the date of the residential property purchase in order to enjoy lower ABSD liability. The date of issue reflected in the IC collection slip would be taken as when the status was granted.

When must ABSD and BSD be paid?

BSD and ABSD must be paid within 14 days after the date of the signed Contract or Agreement. Where the Contract or Agreement is executed (signed) overseas, BSD and ABSD must be paid within 30 days after the receipt of the Contract or Agreement in Singapore. A document is considered to be duly stamped only when stamp duty is fully paid. Audit checks will be conducted by IRAS to ensure that BSD and ABSD are duly paid. Under the Stamp Duties Act, a penalty of 4 times the amount of unpaid duty can be imposed.

Can you defer the payment of Stamp Duty?

Stamp duty is an upfront cost that a buyer has to consciously set aside when he decides to purchase a property. It must be paid in full and cannot be deferred. Inadequate payment or late payment of stamp duty is tantamount to non-stamping and penalties would apply.

ASBD was first introduced in December 2011 as a “cooling measure” to discourage foreigners and entities from residential property purchase, especially the buying of multiple properties. The latest round of cooling measures took effect on 16 December. Aside from tightened loan limits which saw the Loan-to-Value (LTV) limit for HDB-granted loans dip from 90% to 85% and Total Debt Servicing Ratio (TDSR) threshold tightening, dropping from 60% to 55%, ABSD rates were adjusted.

Written by Ravi Chandran

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