Buying property under trust to avoid ABSD?
Over the past years, Singapore government has introduced a series of “cooling measures” to control property demands and prices. A previous cooling measure was implemented in mid-2018, just before the fast-rising property prices surpass its previous peak of 2013. In the latest cool measure in Dec 2021, the ABSD rates were revised upwards.
The intent is not to dampen the residential property market, but to curb speculative activities to stabilise the property prices.
One of the measures is the introduction of additional buyer stamp duty (ABSD) on buyers who have already own one or more properties. The ABSD can be quite a substantial amount, pegging at 12% and 15% for Singaporean buying 2nd and 3rd residential property onwards, respectively.
Hence, it can be a lucrative saving for buyers with more than one property, if they are able to purchase without having to pay for the ABSD. As such, many people are exploring legal process to avoid paying the increasing ABSD, such as using trust instrument.
What is a Trust?
When you cannot take it with you, what would you do to our wealth on the last day of your breath?
What comes to most people’s mind is to set a will to ensure distribution of assets according to our desire.
However, do we feel secured in handing over all our assets – inclusive of business, insurance, investments, cash and properties – to our loved ones in one-lump sum if we passed on? Especially, to our young children.
Therefore, it is becoming common that people are setting up trusts to protect their assets and to have more control over how their wealth is being distributed. Just like having a will, trusts setting has become popular even for the average population.
The benefits of setting up a trust are:
Protects our assets and wealth from 3rd parties claim, creditors and lawsuits, with an irrevocable trust.
Enable us to better control how the assets or money would be distributed to the beneficiaries, eg, when, frequency, the amount and the duration after we passed on.
Able to distribute regular pay-outs from the income earned from the trust.
Allow us to state the conditions to be fulfilled before the beneficiaries receive the assets.
Efficient distribute of our assets to beneficiaries without much cost, delay or publicity of probate court.
No estate duty, capital gains tax, or exchange control.
Allow us to nominate a successor trustee to manages our trust after we passed on, or when we become unable to do so.
Buying Property under Trust
In legacy planning, buying property under trust is a common way of passing down our assets as a gift to our loved ones, especially to those who does not have the legal capacity in owning a property.
How it Works?
A trust is considered set up when a Deed of Settlement is executed, and the property is transferred into the trust. It will involve the following people:
The settlor, who is the person or entity who set up the trust.
The trustee, who is the person or entity appointed by the settlor to hold the legal title of the trust property and perform the duties of the trustee. The trustee can be the settlor himself – in which case, the settlor declares himself to be holding trust property on trust for the beneficiary.
The beneficiary, who is the person or entity named by the settlor to benefit from the trust. The beneficiary holds the equitable interest in the trust property.
In executing the Deed of Settlement, the settlor must decide the key terms of the trust, including:
Who are the initial beneficiaries?
Who to appoint as trustee(s) of the trust?
Which powers the settlor wishes to retain?
With this structure, the trustee will be held responsible to manage the trust property (including rental of the property, paying the relevant taxes and duties) for the benefit of the beneficiary.
The settlor should also nominate an alternative beneficiary to prevent the gift from failing, in case one beneficiary passed on earlier.
Although both HDB and private properties can be put under trust property, HDB’s prior approval is required before setting a trust over a HDB property.
Usage of CPF Savings
According to CPF rules, CPF savings can be used to buy an HDB flat under the Public Housing Scheme or a private residential property under the Private Properties Scheme.
Therefore, CPF savings from the Ordinary Account can be used to finance the trust property, subjected to the eligibility of individual’s CPF account and CPF regulations.
Disclosure of Information
The Inland Revenue Authority of Singapore (IRAS) would require the following information for setting up a trust:
Reasons for acquiring the property in the name of the beneficiary.
Usage of the property.
Relationship between the trustee and beneficiary.
A valuation report will be required to compute the stamp duties, based on the valuation or the purchase price, whichever is higher.
As a large sum of cash is involved, the buyer/settlor would have to declare the source of funds to purchase the property due to the financial regulations.
Advantages of Buying Property under Trust
There are advantages in buying property under trust for our child/children.
Buying under a child’s name, who is above the legal age of 21, can have a longer loan tenure and a full 75% of Loan-To-Value.
Send a good gesture to our child to show our love and goodwill.
Source of income to pay for expenses for the child upbringing; pave the way of our child towards a comfortable life; rental income can be used for our child’s expenses and proceeds from sale of the property may be used to supplement the education cost.
The value of the property bought under trust will not be included in the calculation in any estate duty.
Buying under Trust to Dodge ABSD?
If we have the intent to give the property to our children, then buying under trust is always a Yes. We may as well buy it now under their name instead of having to pay ABSD unnecessarily and then transfer to them later.
Nevertheless, the purpose of doing so has been tweed to solely to avoid paying ABSD. But, does it really weigh in our favour to do so?
On 8 May 22, the Government announced that ABSD of 35% will apply on any transfer of residential property into a living trust i.e. a trust that is created by a person during his or her lifetime, with effect from 9 May 22. This will be known as ABSD (Trust).
Hence, any conveyance, assignment or transfer on sale of residential property to a trustee to hold on trust and any instrument chargeable in like manner will be subject to the ABSD (Trust) rate of 35%.
Remission of ABSD (Trust) may be provided via a refund where the conveyance, assignment or transfer on sale of residential property to a person i.e. trustee, is held on trust for one or more identifiable individual beneficiaries only (whether or not the conveyance, transfer or assignment is also made to another person).
The amount remitted will be based on the difference between the ABSD (Trust) rate of 35% and ABSD rate corresponding to the profile of the beneficial owner with the highest applicable ABSD rate. ABSD (Trust) of 35% is to be paid upfront, and an application for the refund must be made to IRAS within six months after the date of execution of the instrument.
Therefore, if the identified beneficial (eg. young child) does not own any property at the point of transfer, then the full ABSD (trust) will be remissible.
Refer to https://www.iras.gov.sg/taxes/stamp-duty/for-property/appeals-refunds-reliefs-and-remissions/common-stamp-duty-remissions-and-reliefs-for-property/remission-of-absd-(trust) for details of remission.
By doing so, there may be some unintended consequences, especially for an irrevocable trust that is not revocable or changeable. We will no longer own the assets we have placed into the trust.
High Cash Layout. We can hardly get a loan to buy property under trust for a child who is below 21 years old. Banks will look at the owner’s (beneficiary) credit status, who will not have any financial capacity to serve the loan then.
Against Parent’s Wish. The worst nightmare would be the child turning against the parent’s wish for the property. The child may decide to sell the property after it is transferred to him/her and keep the proceeds. Or the child could mortgage the property for a loan. The trustee has no control over the property.
Property Count. The property under trust will be counted in the number of properties owned by the child. As such, the child will not be able to buy HDB flat and have to pay ABSD for the next property purchase.
Credit Worthiness. The child’s credit rating will be affected if we jeopardised the mortgage repayments.
Income Tax. The child will have to declare any rental income from the property and income tax is payable.
ABSD Claw Back. If property is bought under trust for the sole purpose of avoiding ABSD, the authority can claw back the ABSD, plus penalties. Section 33A of the Stamp Duties Act (SDA) states that in a situation where a trust is set up, whether directly or indirectly, to relieve any person from any liability to pay duty or to avoid any liability to pay duty, the Commissioner of Stamp Duties may disregard the transaction and recover the duties together with any penalties from the purchaser.
With the intention of providing a home as gift for our child, buying property under trust will be an excellent idea. It defray the ABSD and enable us to purchase now at a lower prices as housing prices will be always on a rise in the longer-term.
Therefore, it would be better to buy a home now to ensure a roof for our children, at the same start growing their wealth through appreciation in property values.
On the other hand, besides being in breach of the SDA, there are other risks if the actual intention for purchasing the property under trust is not for the benefit of the child but solely to avoid ABSD.
A Real Estate professional with proven records and 10 years’ experience in helping clients to acquire their dream homes and fulfilling their property investment goals. Skilled in facilitating purchase, sale and leasing of commercial, industrial, private residential and HDB properties, I enjoy my interactions with clients and find joys and sense of fulfilment whenever they found the properties that met their needs or when they benefited from their investments in the properties that I had helped them purchase.