If you are thinking of buying a second property, it may be simpler to just pay the additional buyer’s stamp duty (ABSD) than to buy the home under a trust set up for your family members.
Buying a property under a trust now requires an upfront ABSD of 65 per cent of the purchase price, following the hike on April 27 that increased the previous levy of 35 per cent by a whopping 30 percentage points.
Such payment will be refunded only if all the conditions of the trust are met.
As banks will not provide mortgages for a property that is held for minors who have no income, the buyer must pay for the home with cash.
That means that for an apartment that costs $1 million, the total cash outlay for the trust will be about $1.7 million if you add ABSD plus other transaction costs.
You should consider whether the purchase is really suitable for junior as he or she will eventually take over the asset.
If the home is too small, it may have to be sold because it will impede your child’s chances of buying his or her own home.
For your children, owning a property means they will not be able to apply for a Housing Board flat, and for Singaporeans, buying a second home means forking out money for the current ABSD of 20 per cent.
Just like for all investments, there is no guarantee your property will make a profit if you have to unload it urgently.
Not the best way to hold properties
Some people set up trusts as a way to get relatives to hold assets for them without incurring the ABSD, but the recent changes may make them think twice.
Take a man who wants to buy another property for his wife, who is already a co-owner of their matrimonial home.
If a trust is used, he would first have to pay ABSD of 65 per cent upfront. As the wife already has an interest in their home, she is deemed to be buying a second property and is subject to the 20 per cent ABSD.
So, even if the man qualifies for a refund under the trust rules, he will get back only 45 per cent of his initial payment and not the full sum.
It may be more efficient for the wife to just buy the property directly. If she is drawing an income, she could apply for a mortgage and so reduce the need to pay in cash.
No more vague conditions
In the past, many parents imposed conditions that would limit their children’s rights over a property until they had fulfilled certain obligations.
These might be that the child would get the property only after he or she had reached a certain age or had done something the parents wanted, such as getting married.
Of course, parents can still impose whatever terms they wish on their children when buying with a trust, but this now comes with a big price tag because they may not be eligible for a refund of the 65 per cent ABSD that accompanies the purchase.
A refund would be approved only if the beneficiaries became “owners” of the properties immediately, and they must also be “identifiable”, as opposed to unborn children or beneficiaries whose rights are conditional to certain qualifications being met.
Take a parent buying a trust property for a daughter and son who will eventually own it in equal shares.
The daughter is already working, but the son has yet to start tertiary education.
In the trust, the parent states that the son can take ownership of his half-share only if he graduates from university.
In such cases, the parent would not be able to get a refund of the upfront ABSD because the son would not be deemed as an identifiable individual beneficiary as he has not fulfilled the graduation condition when the trust is set up.
Similarly, parents who state that their children can take over the trust property only at the age of 21 would also not be eligible for any refund because you cannot defer beneficial ownership under the ABSD trust rules.
The lesson here is this: You should not let the ABSD dictate the way you plan your asset distribution, especially when you still have more years to go before retirement.
After all, if you trust your own planning, having all the assets in your name gives you more flexibility in doing the right thing for your family.
“Source:[Why paying ABSD for a second property beats setting up a trust] © Singapore Press Holdings Limited. Permission required for reproduction”
