New development chief Paul Chan Mo-po is at the centre of an investigation by buildings officials just days after taking office over claims that he and his wife illegally subdivided properties.
The couple also face claims that they understated the selling price of another flat to avoid tax.
Chan - who took over after Mak Chai-kwong was arrested by the Independent Commission Against Corruption and quit less than two weeks into the new government's term of office - said the flats were owned by his wife, Frieda Hui Po-ming.
Hui said she had quit as a director of the holding company which owned the flats and that they were now managed by her family. Chan, whose responsibilities include supervising the Buildings Department and tackling subdivided flats - which have been linked to a series of fatal fires in recent months - said the investigators would not report to him and would treat the case in an impartial manner. Reports emerged on Monday that Chan and Hui had been directors of a company, Harvest Charm Development, which owned two flats in Kowloon that were divided into three to five units each.
While Chan quit his directorship in 1997, documents obtained by the Post show that Hui resigned on July 1 - the date Chief Executive Leung Chun-ying's government took office.
Chan, then a lawmaker, had been tipped to join Leung's administration in the new post of deputy financial secretary before the Development Bureau vacancy arose.
The couple's home in Leighton Hill, Causeway Bay, is owned by the same two offshore companies listed as the owners of Harvest Charm. In her statement last night, Hui said Chan had not been told of the rental arrangements on the two flats and said she was not responsible for the daily operation of the company.
She said the two flats had been leased to the same person and the contract did not allow for subdivision. Harvest Charm would take back the two flats immediately, she said, even though the leases ran until the end of the month.
A man surnamed Wu told Cable TV yesterday that he was the principal tenant and said three of the five subdivided units in the flat at 136 Shanghai Street in Jordan were created by him. He said: 'I didn't know who the owner was. I can swear that I didn't contact Chan.'
The South China Morning Post visited the flat in Jordan and another at the Hoi Hing Building in Tai Kok Tsui yesterday and found Buildings Department officials asking tenants to let them in.
The lights were on but the officials were not allowed in. One elderly resident said he was paying HK$1,260 per month to live in a 27 sq ft unit at the flat in Jordan.
'But I've fixed up the place and I have everything I need inside,' he said, adding he didn't know who owned the flat. Hui also denied claims that the couple had evaded stamp duty and profits tax when they sold another property in Tai Kok Tsui for redevelopment.
She admitted they had received a relocation fee as well as the sale price of the property, but said both were declared, so 'it doesn't involve tax evasion'.
The flat was bought by Harvest Charm in 1994 for HK$638,000 and was sold for HK$1.2 million in 2009.
But Chan Man-yau, a former Yau Tsim Mong district councillor, said when his mother sold a flat in the building the buyer understated the price, with HK$1.5 million of the HK$2.8 million price treated as a relocation fee.
Veteran surveyor Charles Chan Chiu-kwok said the per-square-foot price in the district at the time was typically more than HK$4,000. The per-square-foot price for the Harvest Charm flat was HK$3,600.
While property transactions valued at less than HK$2 million attract stamp duty at just HK$100, those paying a higher price must pay 1.5 per cent of the purchase price.
The Inland Revenue Department said it did not comment on individual cases, but Taxation Institute president Philip Hung said the department had the power to act in cases where a flat sale was divided into a 'series of transactions'.
But a grey area in the rules allows a seller to argue that a low selling price and high relocation fee are justified.
'The seller can claim that the flat is old and the redevelopment potential is high enough that the buyer is willing to pay a huge relocation fee to trigger the transaction,' he said.
Democratic Party lawmaker Lee Wing-tat said he would ask the department to provide details of the case and ask whether Hui had made false claims when reporting the transaction. Political analyst Sung Lap-kung said Chan had showed a lack of political sensitivity. 'Leaving the properties to his wife is not a good excuse,' Sung said.
The monthly rent, in Hong Kong dollars, being paid by one elderly male resident for a subdivided unit in the flat in Shanghai Street, Jordan