Transferring property to a relative is a legal means of acquiring properties and avoiding taxes in Hong Kong. After the government implemented double stamp duty in 2013 and increased it for second-home buyers to 15% in 2016, homeowners began transferring property titles from joint to single ownership, enabling them to restore the ‘first-time purchaser’ status to re-enter the property market without triggering the additional tax.
How Does it Work?
A person holding property as a joint proprietor or individual owner may transfer (sell) their property to a close relative such as a parent, sibling, spouse or child, exempting them from paying the 15% buyers’ stamp duty (BSD). The transaction is subject to Ad Valorem stamp duty (AVD) based on the property’s determined value, but the transferor becomes eligible for the first-time buyer status, voiding them from the BSD on a future purchase.
Saving on Taxes
For example, a couple jointly owns a HK$ 6 million property. The husband transfers the property title to his spouse. The total AVD payable is HK$45,000. Later, he purchases a unit with a market value of HK$8 million as a first-time buyer, avoiding the 15% BSD (HK$1.2 million), instead of paying only the 3.75% stamp duty (HK$300,000). This results in a net tax savings of HK$855,000 compared to purchasing the property without having transferred ownership of the original property.
Under current laws, the husband may be entitled to exemption from the BSD on each new purchase. The stamp duty applicable to first-time homebuyers is much lower, ranging from 1.5% to 4.25%. If the property is under HK$2 million, only a printing fee of HK$100 is required.
In the first-hand property market, a similar strategy has evolved, with some prospective buyers registering for multiple lottery applications with their relative’s names in order to increase their chances. If successful, they can transfer the property ownership from their relative to themselves, typically after waiting three years to avoid being subject to the Special Stamp Duty (SSD). These tax-saving strategies are not illegal and is obviously beneficial, but one must pay attention to the risks involved.
What are the Risks?
Mortgage financing: Banks are naturally careful in considering the financial strength of all parties involved, particularly for older purchasers or those with multiple properties in their portfolio. In the above example, he could provide a personal guarantee on his wife’s mortgage, though again the bank will review the combined financial strength of both parties. The same applies to a parent transferring ownership to a child.
Costs: Consider both the immediate costs and those that may be incurred later. If the mortgage is transferred before the expiry of a penalty period, you may have to return the cash rebate and pay the penalty interest to the bank.
Estate planning: Separate ownership results in a more protracted probate process if the sole owner dies, especially if they do not have an updated will, which then leads to an even more exhaustive intestate court process and potential legal disputes within families.
Other tax and title considerations: Some owners may attempt to transfer their property below market price, but tax authorities have the right to recover the difference, potentially with a penalty. Even when done as a Deed of Gift (with no money changing hands), it is still considered a property transfer and subject to the same tax treatment as a sale, it is also subject to claims by creditors if the donor declares bankruptcy within five years. This can cause complications later, making the property difficult to sell, since banks may be unwilling to provide a mortgage to a new buyer during that five-year period.
Consider potential complexities and engage professional legal and tax advisors regarding property transfers. The government has indicated that it is closely monitoring such transfers, so stay abreast of the latest policies in case they change.
Note: Illustrations in this article are for reference only and no representation or warranty is made regarding their accuracy. This article in no way represents legal, tax, accounting or investment advice. Readers considering real estate transactions should consult professionals in these areas for advice.