Contributed by Anthony Law Corporation
To most, a residential property is first a home – a roof over the head. But for others, houses are a form of investment with some parents purchasing properties for their children under trusts. Here, we explore the objectives behind buying in trusts and the implication of the new ABSD (Trust) rule introduced in May 2022.
1. Why should one buy properties in Trust?
Some parents purchase homes for their children using a trust structure for a variety of reasons, mainly driven by more efficient and legitimate tax planning as well as succession planning. While a child (i.e. a person below 21 years old) does not have the legal capacity to own a property in his/her own name yet, his/her parents may nevertheless buy a property for the child and hold it in trust for the child’s benefit, which allows the child to beneficially own the property.
These trust structures are also used by parents who want to give an advanced inheritance of residential property to their children, especially if these are minor children, instead of waiting to transfer these assets upon their demise. Some may also prefer buying property in trust as it allows them greater control over what happens should they meet their demise as their descendants could possibly avoid inheritance taxes.
2. Who can buy a property in Trust?
Anyone who is cash-rich will absolutely be able to buy properties in trust, as purchases of residential properties using a trust structure are usually paid fully in cash. This would need a prudent financial planning as well as having a large coffer – all of which are vital considerations when planning to purchase property using a trust structure for the benefit of one’s child or children.
In other words, as long as you have a lot of cash to spare or even extra cash you do not currently need, you can already start buying properties in trust. Buying a property using a trust structure is an available option or tool for anyone who wishes to make a gift of advanced inheritance or for tax and/or succession planning.
3. How can one go about buying a property in Trust? What are the steps and requirements?
Generally, a trust is set up by the trustee with the following steps:
– Executing the trust instrument trust or trust deed; and
– Transferring of assets into the trust.
In executing the trust instrument, the settlor or trustee must clearly decide the key terms of the trust which would include:
– Who the beneficiary is;
– Who will be appointed as trustee of the trust;
– The powers of the trustee; and
– The vesting of the beneficial interest.
Bear in mind that properties purchased using a trust structure will have to be fully paid for in cash. CPF monies cannot be used for the purchase and banks are also unable to extend a loan for the purchasing of property using a trust structure.
4. The government recently introduced the ABSD (Trust). What is this about and how will it impact purchasing in Trust?
Previously, the ABSD did not apply to living trust where there is no identifiable beneficial owner at the time of asset transfer into the trust. One could say that this may no longer be the case. From May 9, 2022 onwards, The Ministry of Finance (MOF) announced that additional buyer’s stamp duty (ABSD) of 35% will apply to any transfer of residential property into a living trust. This ABSD of 35% is to be paid upfront (i.e., within 14 days of executing the sale and purchase agreement or exercising the option to purchase).
This means the rule change plugged a potential policy loophole. However, a trustee may apply to the Inland Revenue Authority of Singapore (IRAS) for a refund of the ABSD (Trust) subject to fulfilling various conditions – namely, that all beneficial owners are identifiable, that the beneficial ownership has been vested in the beneficiary or beneficiaries and that the trust cannot be revoked, varied or subject to any subsequent conditions.
According to IRAS, the 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. If the conditions are met, 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.
As an ABSD (Trust) of 35% is to be paid up front, an application for the refund must be made to IRAS within six months after the date of execution of the instrument. Most applications will be processed within 2 months from the date of complete information being submitted. Where the application has been approved, the refund will be made within 1 month after approval. While the process may seem complicated and troublesome, the government’s introduction of ABSD (Trust) is to prevent situations where some try to avoid paying ABSD by not buying in their own names. Therefore, as long as the beneficial ownership of the property belongs to the beneficiary, you have nothing to worry about when making this decision. This would ensure that the beneficiary will become the real owner of the property and that the property is not in fact controlled by the person who created the trust, and to avoid those buying a property in others’ names instead of their own.
5. With the new rules, does it still make sense to buy a residential property in Trust? If so, why?
While there may be a plug in the policy loophole due to the change in rules, the ABSD (Trust) is not expected to have much of an impact on the wider residential market. As properties purchased using a trust structure already account for a small minority among the large number of private housing units transacted each year, this decision remains an exclusive one to be made by those who are able.
It is estimated that 10% or less than that of private homebuyers purchase property using a trust structure for the benefit of their children. And those buying properties using a trust structure for the benefit of their children would put their Singaporean child or family member as the beneficiary of the trust.
Thus, the net impact on these trust structures is neutral. This is because they can then apply to IRAS for a refund of ABSD (Trust), so the purchase of residential property using a trust structure will likely continue. Besides, people who purchase properties using a trust structure tend to be the ultra-wealthy. The upfront payment of 35% (which they may eventually get back) may not be too much of a deterrent in lieu of the tax savings of ABSD which may be significant.
Therefore, the imposition of ABSD (Trust) has little effect. Purchasing property using a trust structure would still be attractive for those who have the means. With the imposition of ABSD (Trust) this means that they will have to have an additional 35% of the purchase price upfront. If they meet certain conditions, for instance, if the beneficiary is identifiable as a Singapore citizen with no prior Singapore residential properties, the ABSD refund will be in full anyway. In the circle of people who purchase properties via trust, these trusts are set up as vehicles for genuine gifts as well as tax and estate/succession planning. So the imposition of the new ABSD (Trust) does not change that. If you are new to this and thinking of setting up a trust for your loved ones, be sure to weigh all your options, be prudent with financial planning and make sure you did enough research before making that decision.
And alas, if you find yourself stuck in a rut even after weighing all possible options, you may need a professional’s opinion. In this case, schedule a visit with us or book a free consultation with our trusted and renowned representatives. Lastly, don’t forget to like, subscribe and share our articles with your friends if you think our content is useful to you. And if you would like us write a review for any property projects, have a blast in the comment section below.
