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Tax Tips : Part 2 – Stamp Duties on Transfer of Residential Property
In our last post, we have talked about how the HKSAR Government raised the property’s Stamp Duty for “cooling down” speculation in the property market, especially the residential market.
Here we will take a look at some practical ways to reduce the extra Stamp Duty expense and analysis how effective these are. We are focusing on the residential property market here.
The objective of these approaches are to avoid Scale 1 AVD (thus to enjoy Scale 2 AVD), therefore the transfee must be a Hong Kong Permanent Resident and does no have other Hong Kong property at the time of transfer.
“Delisting” from joint-ownership residential property
If a prospective property purchaser has a jointly-owned residential property, he can “delist” himself from the ownership to become eligible to Scale 2 of AVD on the purchase of the new unit.
For example, a couple has a jointly-owned (half-half) home flat, the husband can transfer the ownership to his wife.
However, the transfer of ownership to the co-owner is not tax-free; it will incur AVD based on the value of the property. Fortunately, the tax calculation takes the only half value of the old property.
Assume the couple jointly held a residential property worth HK$5 million. The husband was delisted by transferring the half ownership to the wife, and purchased a new residential property worth HK$6 million. All expenses of Stamp Duty are as follows:
| Stamp Duty | Expense |
|---|---|
| AVD Scale 2 | (HK$5M / 2) x 1.5% = HK$37,500 |
| Stamp Duty | Expense |
|---|---|
| AVD Scale 2 | HK$6M x 3% = HK$180,000 |
Total Stamp Duty expense: HK$210,750
The possible saving is huge! If the prospective buyer purchased the new property :
| Stamp Duty | Expense |
|---|---|
| AVD Scale 1 Part 1 | HK$6M x 15% = HK$900,000 |
Total saving of Stamp Duty from “delisting”: HK$900,000 – HK$210,750 = HK$682,500
Transferring a residential property to a family member
If a prospective buyer owns a home flat, the property can be “transferred” to an HKPR relative like parents, spouses, brothers and sisters who do not have other Hong Kong residential property. However, the transfer will incur AVD as well.
Assume a prospective buyer held a residential property worth HK$5 million, then he transferred the property to his father, and purchased a new residential property worth HK$6 million. All expenses of Stamp Duty are as follows:
here is the calculation.
| Stamp Duty | Expense |
|---|---|
| AVD Scale 2 | HK$5M x 3% = HK$150,000 |
| Stamp Duty | Expense |
|---|---|
| AVD Scale 2 | HK$6M x 3% = HK$180,000 |
Total Stamp Duty expense: HK$330,000
In case the prospective buyer purchased the new property without “transferring”:
| Stamp Duty | Expense |
|---|---|
| AVD Scale 1 Part 1 | HK$6M x 15% = HK$900,000 |
Total saving of Stamp Duty from “transferring”: HK$900,000 – HK$330,000 = HK$570,000
For Corporate only: Transferring the shares of a company holding residential property
It is a traditional way to avoid AVD in Hong Kong, and it still works and better as this can prevent from paying the SSD and BSD. We know that limited companies can hold assets like a real person, and a company can be transferred to others by transferring its shares. In Hong Kong tax law, the Stamp Duty is incurred on the transfer of the shares; however, this tax rate is lower than that of the AVD on property transfer.
For example, Company A holds a property unit valued HK$10 million, and its sole shareholder is Mr Chan. Then, Mr Chan sells the Company A to Mr Ho, such that only the Stamp Duty, which is calculated at 0.2% of the stock value can apply. If the company has no actual business carrying on and the company is holding only this unit as its asset, the total Stamp Duty expense is HK$20,000 merely and no AVD, SSD nor BSD are applied. It is because the legal owner of the property is Company A, the property is not technically sold, but the company is.
It is confirmed that transferring shares of an asset-holding company can avoid all property-transfer Stamp Duty.
For Corporate only: Using a company to buy a residential property.
For a prospective buyer of a residential property, you can choose to own it under your name or your limited company.
If you buy a property under the company’s name, you have to bear both the Scale 1 Part 1 AVD and the BSD on the purchase. It is because the legal buyer is technically not a Hong Kong Permanent Resident. The total tax incurred is 30% of the value of the property.
Nevertheless, you, as a corporate, will definitely not be able to obtain a mortgage loan for the property because not banks offer such loan products for corporates. Therefore, you can either pay cash in full or access other loan products which require collateral, higher interest rate, and a shorter loan period comparing with the mortgage.
As the entry threshold of using companies to purchase property is much higher, it is no wonder that the so-called “professional investors” appreciate this method, by who has a large pool of capital and have access to alternative financing channels.
Takeaway
AsiaBC offers tax representative services for both individual and corporate bodies doing business in Hong Kong. If you need to optimize your tax expense, feel free to contact us.
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