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01/06/2011

How to plan ahead for special stamp duty

 
I am considering buying a flat for investment purposes. The Hong Kong government recently introduced a special stamp duty on such investment purchases. What can I do to make my transaction tax effective? Or what can I do to minimise tax?
 
If the new legislation is passed, special stamp duty (SSD) will be levied on transactions on residential properties of any value if the property was purchased on or after November 20, 2010, then sold within 24 months after purchase. The SSD rates are (i) 5 per cent (for properties held for more than 12 months but for 24 months or less); (ii) 10 per cent (for properties held for more than 6 months but for 12 months or less); and (iii) 15 per cent (for properties held for six months or less) of the stated consideration or market value (if assessed by the Stamp Office to be higher than the stated consideration) of the property.
 
If you are concerned about any SSD payment in future because you are not sure how long you will hold the property, consider buying the property in the name of a company, which can be a Hong Kong or an offshore company. It is quite common for bigger transactions to be conducted by way of sale and purchase of shares of the property holding company instead of the property. The stamp duty payable on the sale of shares in a Hong Kong company is only 0.2 per cent of the consideration. No stamp duty is payable on the transfer of shares in an offshore company. For more sophisticated transactions, consider setting up one more offshore company to hold the property holding company. This will enable the share transfer to take place at the upper level. Other than stating the fact that the present SSD regime does not cover future sale of property by way of share deal, whether at the level of the property holding firm or the upper level, you can also save the future purchaser from a substantial amount of stamp duty (which can go up 4.25 per cent for property transactions of HK$21,739,120 or over). Hopefully, that should result in a higher purchase price for the property.
 
However, a share deal would typically involve hidden risks such as tax and contractual liabilities and more complicated transaction documents. Therefore, if the purchaser is less sophisticated or the potential saving in stamp duty is not big, the purchaser may not prefer a share deal. Last, consider the cost of maintaining a company to hold the property and that you might need longer processing time to obtain bank finance if the property is held in the name of a company.
 
I am considering buying a property that contains illegal works or is subject to a building order issued by the Building Authority. Can I ignore the building order or avoid dismantling the illegal works?
 
If you are buying a property (whether residential or commercial) with illegal works or which is subject to a building order, make sure that (i) the vendor of the property will undertake to remove such illegal works or comply with such building order before completion of the transaction; or (ii) you retain sufficient money out of the purchase price so that you can carry out the compliance works after completion. Make sure that you provide for this in the provisional agreement you sign with the vendor. However, if despite the presence of illegal works or a building order, you decide to purchase the property without making the above provisions in  the provisional agreement, factor the cost of removal or compliance into the purchase price of the property.
 
Further, consider getting advice from a surveyor or structural engineer on the structural safety of the property and whether this would affect the bank's willingness to finance your purchase.
 
Write to Us Send your legal questions to bizpostt@scmp.com.
 
The information contained in this article should not be relied on as legal advice and should not be regarded as a substitute for detailed advice in individual cases. If advice concerning individual problems or other expert assistance is required, the service of a competent professional adviser should be sought.

SOURCE: SCMP



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