New Reporter
25-09-23, 09:18
How two parents planned to evade ABSD but ended up losing their properties
Tan Ooi Boon
Sep 24, 2023
Buying a property under a legal trust for your kids so you can dodge a hefty tax bill was a crafty bit of financial footwork until a year ago but it can turn into a costly own goal, as two parents have discovered.
They did what many families in Singapore did before a law change in May 2022: Use a trust to put the extra properties under their kids’ name as no Additional Buyer’s Stamp Duty (ABSD) would be levied on such a transaction. Singaporeans have to pay such duty for second and subsequent properties.
Both families did this and it would likely have been unremarkable but for an all-too familiar event – messy divorces that inevitably involved a fight over property.
A key point that may have gone unnoticed by the parents is that buying real estate for a child under a trust is the same as letting the child actually own the property, as it is considered a gift.
Both fathers in these divorces wanted to reclaim the properties bought under the trusts for their sons, claiming that they did this only to avoid the ABSD. They contended that the transactions were shams aimed at skipping the stamp duty, and they had no intention of giving the properties to their kids.
The sons and the former wives were on the same side, which meant the battle lines were clearly drawn.
The outcomes were similar as well – the fathers lost their cases when the High Court ruled that the trusts were properly set up for the kids, despite the claims that their primary purpose was to avoid the ABSD.
The court allowed the property to be transferred to the son in one of the cases as he was already a young adult. In the other case, the court let the son sack his father as a manager of the trust since he had acted against the son’s interest.
Changes in the law in 2022 have made such ruses more trouble than they are worth.
Buying a property under a trust now requires an upfront ABSD of 65 per cent of the purchase price, after moves in April 2023 that sharply hiked the previous levy of 35 per cent imposed in May 2022 by a whopping 30 percentage points. Such payments can be refunded only if the buyers can show that the trusts were genuinely set up to give the properties to beneficiaries.
Indeed, the recent High Court rulings should serve as an important lesson on why it does not pay to exploit legal “loopholes” to avoid paying the ABSD.
Father had ‘loan’ agreement to stake claim to son’s property
A husband and his wife, then in their 50s, bought a $5 million home to be held on trust for their son in July 2020. They paid for most of it by selling three other properties they owned. The trust stipulated that the property title would transfer to the son, then 26, when he turned 40.
As part of the deal, the man claimed that his son was made to sign a loan agreement which stated that he had borrowed about $5 million from his parents to buy the property. This was apparently done as a measure to prevent the son’s future wife from staking a claim to the home should their marriage hit the rocks.
The man later changed tack and said the agreement was meant to protect himself as he had given up all his other properties to buy the trust property. But the loan deal turned out to be useless because there was no proof to show that the son actually signed it.
About a year after the property purchase, the father’s own marriage broke down, and his wife filed for divorce. As a result, the son applied to the court for the trust to be terminated so that he would become the legal owner immediately.
He did this because he wanted to avoid further squabbles between his parents and to ensure that he, his mother and his sister could continue to live in the house.
His father argued that the asset was his all along because the trust was a sham set up to avoid paying the ABSD.
High Court Judge Goh Yihan ruled that the trust was not a sham because the evidence showed that during their better times, the couple had intended to make their son the eventual owner of the property.
“The fact that the trust arrangement additionally allowed them to save on ABSD is an incidental benefit that does not detract from their overall intention to gift their elder child and only son a legacy property while the both of them were still living,” he added.
The judge noted that the parents had engaged a lawyer to help set up the “irrevocable” trust for their son and that they would have been advised that it would not be possible for either of them to stake a claim to the property.
As a result, the court ordered the trust to be terminated and the home transferred to the son.
Father who acted against his son’s interests
In another case, the parents bought a $1.5 million condominium unit and put it under a trust for their elder son while they would manage or lease it as the trustees. All was well until their marriage failed, and the husband staked his claim to the unit.
He argued that the condo unit did not belong to his son because the trust was a sham to dodge the ABSD. The man added that his former wife came up with the idea to hold the property this way and that he went along with it only because of her “undue influence”.
But High Court Judge Kannan Ramesh did not buy his story because the man, who is a civil servant, is educated and intelligent. It was most unlikely that he would have been ignorant of the potential ramifications of trying to evade taxes, given the impact this could have on his career, the judge added.
“In the same vein, it is most unlikely that he would have intentionally or knowingly exposed himself to those ramifications by setting out to evade the ABSD,” noted Judge Ramesh, who ruled that the trust was valid.
“The more likely inference, therefore, is that there was never any such attempt to evade the ABSD in the first place.”
During the trial, the husband even provided a wrong amount for the ABSD that he allegedly evaded due to the “sham” trust. This led the judge to dismiss his claim because he would have remembered the actual levy if he had plotted to evade the tax as it was quite a large amount.
As the man sought to undermine the son’s interest, the judge also approved the former wife’s application to have him removed as a trustee for the property.
There are two important lessons from these cases:
1. It is a serious offence to evade taxes. In a way, the fathers in these cases were “lucky” that their arguments of using sham trust to evade the ABSD were dismissed. If they had won their claims by intentionally creating a fake scheme to avoid the levy, they could have been liable to a penalty of up to 400 per cent of the tax avoided as well as possible jail time.
2. Do not create trusts unless you really mean it. Such legal tools are not there for you to get someone to hold properties on your behalf. As the cases have shown, you may want to save on taxes, but you will end up losing the properties totally.
https://www.straitstimes.com/business/invest/parents-lose-their-properties-when-plans-to-evade-absd-fail
Tan Ooi Boon
Sep 24, 2023
Buying a property under a legal trust for your kids so you can dodge a hefty tax bill was a crafty bit of financial footwork until a year ago but it can turn into a costly own goal, as two parents have discovered.
They did what many families in Singapore did before a law change in May 2022: Use a trust to put the extra properties under their kids’ name as no Additional Buyer’s Stamp Duty (ABSD) would be levied on such a transaction. Singaporeans have to pay such duty for second and subsequent properties.
Both families did this and it would likely have been unremarkable but for an all-too familiar event – messy divorces that inevitably involved a fight over property.
A key point that may have gone unnoticed by the parents is that buying real estate for a child under a trust is the same as letting the child actually own the property, as it is considered a gift.
Both fathers in these divorces wanted to reclaim the properties bought under the trusts for their sons, claiming that they did this only to avoid the ABSD. They contended that the transactions were shams aimed at skipping the stamp duty, and they had no intention of giving the properties to their kids.
The sons and the former wives were on the same side, which meant the battle lines were clearly drawn.
The outcomes were similar as well – the fathers lost their cases when the High Court ruled that the trusts were properly set up for the kids, despite the claims that their primary purpose was to avoid the ABSD.
The court allowed the property to be transferred to the son in one of the cases as he was already a young adult. In the other case, the court let the son sack his father as a manager of the trust since he had acted against the son’s interest.
Changes in the law in 2022 have made such ruses more trouble than they are worth.
Buying a property under a trust now requires an upfront ABSD of 65 per cent of the purchase price, after moves in April 2023 that sharply hiked the previous levy of 35 per cent imposed in May 2022 by a whopping 30 percentage points. Such payments can be refunded only if the buyers can show that the trusts were genuinely set up to give the properties to beneficiaries.
Indeed, the recent High Court rulings should serve as an important lesson on why it does not pay to exploit legal “loopholes” to avoid paying the ABSD.
Father had ‘loan’ agreement to stake claim to son’s property
A husband and his wife, then in their 50s, bought a $5 million home to be held on trust for their son in July 2020. They paid for most of it by selling three other properties they owned. The trust stipulated that the property title would transfer to the son, then 26, when he turned 40.
As part of the deal, the man claimed that his son was made to sign a loan agreement which stated that he had borrowed about $5 million from his parents to buy the property. This was apparently done as a measure to prevent the son’s future wife from staking a claim to the home should their marriage hit the rocks.
The man later changed tack and said the agreement was meant to protect himself as he had given up all his other properties to buy the trust property. But the loan deal turned out to be useless because there was no proof to show that the son actually signed it.
About a year after the property purchase, the father’s own marriage broke down, and his wife filed for divorce. As a result, the son applied to the court for the trust to be terminated so that he would become the legal owner immediately.
He did this because he wanted to avoid further squabbles between his parents and to ensure that he, his mother and his sister could continue to live in the house.
His father argued that the asset was his all along because the trust was a sham set up to avoid paying the ABSD.
High Court Judge Goh Yihan ruled that the trust was not a sham because the evidence showed that during their better times, the couple had intended to make their son the eventual owner of the property.
“The fact that the trust arrangement additionally allowed them to save on ABSD is an incidental benefit that does not detract from their overall intention to gift their elder child and only son a legacy property while the both of them were still living,” he added.
The judge noted that the parents had engaged a lawyer to help set up the “irrevocable” trust for their son and that they would have been advised that it would not be possible for either of them to stake a claim to the property.
As a result, the court ordered the trust to be terminated and the home transferred to the son.
Father who acted against his son’s interests
In another case, the parents bought a $1.5 million condominium unit and put it under a trust for their elder son while they would manage or lease it as the trustees. All was well until their marriage failed, and the husband staked his claim to the unit.
He argued that the condo unit did not belong to his son because the trust was a sham to dodge the ABSD. The man added that his former wife came up with the idea to hold the property this way and that he went along with it only because of her “undue influence”.
But High Court Judge Kannan Ramesh did not buy his story because the man, who is a civil servant, is educated and intelligent. It was most unlikely that he would have been ignorant of the potential ramifications of trying to evade taxes, given the impact this could have on his career, the judge added.
“In the same vein, it is most unlikely that he would have intentionally or knowingly exposed himself to those ramifications by setting out to evade the ABSD,” noted Judge Ramesh, who ruled that the trust was valid.
“The more likely inference, therefore, is that there was never any such attempt to evade the ABSD in the first place.”
During the trial, the husband even provided a wrong amount for the ABSD that he allegedly evaded due to the “sham” trust. This led the judge to dismiss his claim because he would have remembered the actual levy if he had plotted to evade the tax as it was quite a large amount.
As the man sought to undermine the son’s interest, the judge also approved the former wife’s application to have him removed as a trustee for the property.
There are two important lessons from these cases:
1. It is a serious offence to evade taxes. In a way, the fathers in these cases were “lucky” that their arguments of using sham trust to evade the ABSD were dismissed. If they had won their claims by intentionally creating a fake scheme to avoid the levy, they could have been liable to a penalty of up to 400 per cent of the tax avoided as well as possible jail time.
2. Do not create trusts unless you really mean it. Such legal tools are not there for you to get someone to hold properties on your behalf. As the cases have shown, you may want to save on taxes, but you will end up losing the properties totally.
https://www.straitstimes.com/business/invest/parents-lose-their-properties-when-plans-to-evade-absd-fail