A property trust to beat ABSD? Beware the drawbacks

Faced with more prohibitive stamp duties on second and subsequent purchases of residential property, some Singaporeans are exploring a trust vehicle to circumvent the latest cooling measures.

While the potential savings may be a lure, lawyers say the restrictive characteristics of such trusts may prove a dampener.

In July, the government announced adjustments which saw higher additional buyer’s stamp duty (ABSD) and tighter loan-to-value (LTV) limits on residential property purchases.

For Singaporeans buying their first residential property, there remains no ABSD but those buying their second or subsequent home now has to pay an ABSD of 12 per cent, up from 7 per cent before. The rate for a third and subsequent property has also increased from 10 to 15 per cent.

For permanent residents buying their first property, the ABSD remains unchanged at 5 per cent. But for their second and subsquent buys, the rate has been raised from 10 to 15 per cent.

But if a parent were to buy a second property and bequeath it to their child through a trust and the beneficiary of the trust is a first-time Singaporean buyer, the purchase will not attract ABSD.

According to Business Times, some lawyers spoke to said there had been some queries from clients about taking this route.

While it is unclear at this point if more of such structures are being established, Lee Liat Yeang, senior partner (real estate practice group) at Dentons Rodyk & Davidson LLP, doesn’t rule out more trust structures being set up.

“Ever since ABSD went up in January 2013, we have seen more of such requests. ABSD has made affected people think of alternative ways of purchasing property.”

But while trust structures have been around since time immemorial, an ordinary person wouldn’t set up a trust for many reasons, he said.

“Once the trust is set up, you can’t revoke or unravel a trust. The person who sets up the trust no longer owns the property, which now belongs to the beneficiary.”

David Chee, director (tax & private client services) at Drew & Napier, added: “As the trust is a fixed trust, the property belongs beneficially to the child absolutely, who can call for the property to be transferred to him or her when the child turns 21. If the property were to be sold before then, the proceeds of sale would also belong to the child.

“Where parents choose to use a trust structure like this to purchase property, they are making an ‘advance inheritance’ to the children, as the children can call for these assets when they turn 21.”

In addition, it is unlikely that bank financing can be secured if the child is under the legal age to own a property, which means that payment for the property would have to be made upfront. This understandably rules out a lot of buyers.

Norman Ho, deputy head (corporate real estate) at Rajah & Tann, said: “A bank is unlikely to grant a loan to the trustee as they are holding the property in trust for the beneficiary, especially when the beneficiary is an infant. The loan must be for the benefit of the beneficiary.”

The trustee has a fiduciary duty to the beneficiary and cannot mortgage the property for his own benefit, Mr Ho added.

The loan hurdle, however, may not be an issue for the super rich, including foreigners, who now have to pay 20 per cent ABSD, compared to 15 per cent before July 6, when they buy Singapore property.

But foreigners who take the trust route do not do it for ABSD reasons as the applicable ABSD is still payable if the beneficiary of a trust is a permanent resident or a foreigner.

In a recent research note, Jefferies analyst Krishna Guha said real estate agents reckon some wealthy residents are buying under a trust structure with a bequeath motive.

Having visited showflats of recently launched properties, namely The Tre Ver, Daintree Residences, Riverfront Residences and The Garden Residences, Mr Guha said: “Higher ABSD, while negative for sentiment, may not be impacting demand as buyers of second and subsequent private units have set up structures to mitigate the impact.”

He added that overall demand is also being underpinned by owners of landed homes in the vicinity, young families with support from their parents, as well as a few cash-rich en-bloc sellers and foreign buyers.

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