Weekend Property

Avoid hefty stamp duty in Hong Kong by buying property in the parent’s name

A son or daughter can get a parent, who has not owned a property before, to buy a home ‘on their behalf’

PUBLISHED : Friday, 24 February, 2017, 9:18am
UPDATED : Friday, 24 February, 2017, 1:40pm

Yip King-keungis the founder of Hong Kong Mortgage Consultants. He looks at buying property in a parent’s name to avoid paying 15 per cent stamp duty imposed on second-home buyers.

What are the tax advantages for the son or daughter having their parent, who has not owned a property before, buy a home “on their behalf”?

Under the stamp duty regime, a buyer, who already owns a property at the time he or she

signs the formal sale agreement, has to pay stamp duty at 15 per cent of the value of the subject property. For a HK$10 million home, the total stamp duty payable would be HK$1.5 million. If the buyer qualifies as a first-time buyer, the stamp duty to be levied is just 3.75 per cent, or HK$375,000. Having a parent, who has not owned a property previously, buy a home “on your behalf” could save

HK$962,500 in tax.

What are the issues arising from such an arrangement, and what are the considerations?

It can limit mortgage finance. If the buyer is a retiree in their 60s or 70s, the lender will usually approve a lower loan to value ratio, such as 40 per cent, and a shorter mortgage term, say 10 years. Of course, the “real buyer” could act as guarantor for the mortgage in order to borrow more and get a longer repayment term. But the bank would still have to review how many assets the guarantor owns, credit score, outstanding loans including mortgages, debt to income ratio, to name a few, and job stability and history. The applicant and guarantor would be stress tested to ensure their repayment ability should mortgage rates rise. In most cases, the guarantor must be a close family relative and have sufficient income to cover any borrowing of their own plus the mortgage they are guaranteeing.

What is Deed of Gift and can it be used to transfer the property “back” to the paying son without incurring those additional taxes?

A Deed of Gift is a formal legal document used to transfer ownership of a property to another person [and no money changes hands]. Most Deed of Gift transfers are carried out between family members. Although no money is involved in a Deed of Gift transfer, the stamp duty regime, including extra taxes levied on second home purchases and resales within three years, remains valid. The taxable property value will be assessed by the Rating and Valuation Department. In the event of bankruptcy of the donor [the parent in this case] within five years of the gift, the creditors of the donor could still claim against the property even though its legal title has been transferred to the son, causing complications down the line. Because of this risk, it would be more difficult for the son to sell the property within five years of the gift, as banks are reluctant to give mortgage loans to the new buyer during the five-year lock-up period.

Are there other potential pitfalls with such an arrangement?

If the parent, who holds the title to the property as the sole owner, dies intestate, or without a will, the property will become part of his or her estate, which will be distributed to the closest family members and then relatives, according to the law of intestacy, such as the surviving spouse, then the children, and then the father or mother of the deceased. If the son is the only child of the parent, things would be easier, [even] without a will. But in the worst-case scenario, conflicts could arise among siblings from the inheritance of the property. It could lead to legal disputes, although I believe the property would be handed back to the son who actually paid for it, court proceedings can be exhausting and traumatic. One way to avoid this nightmare is having the parent agree on writing a will to specify who is going to inherit the property. But remember, a new will always supersedes the old will. My advice is, if you intend to have your parent buy a home with your money, make sure you have communicated it to other family members. My second piece of advice is to keep all your down payment and mortgage payment records as proof.