The rationale and risks of owning one per cent in a Singapore private home

Apr 17, 2023

INSTITUTIONAL investors and corporates typically invest substantial resources to ensure their tax structures are efficient and robust when executing multi-million dollar property deals.

Achieving tax savings can materially impact the return on investment of these big ticket deals.

It is not just large property investors who need to be tax savvy. Individuals buying homes here need to be clever with taxes too.

But are some buyers who test the limits in trouble? In a statement on Apr 6, 2023, the Inland Revenue Authority of Singapore said it is investigating property transactions under an audit to uncover cases of avoidance of stamp duty.

It is looking into “various forms of property holding arrangements”, including “scenarios where buyers purchase properties under a contrived or artificial arrangement in order to reduce or avoid the additional buyer’s stamp duty (ABSD), or any other form of stamp duties they have to pay”, the tax agency said.

In cases of tax avoidance, a party may have to pay the rightful amount of stamp duty plus a 50 per cent surcharge. Further penalties may be imposed if the stamp duty and surcharge are not paid by the deadline.

Home buyers, who want peace of mind, could stop buying private homes using “99-to-1” sales contracts so as to avoid paying ABSD.

A home buyer has to pay buyer’s stamp duty. In 2011, the additional buyer’s stamp duty on home purchases was introduced. Currently, a Singapore citizen pays zero ABSD for buying a first home, 17 per cent for buying a second home, and 25 per cent for buying the third and subsequent homes. Foreigners buying any home in Singapore have to pay 30 per cent ABSD.

In so-called 99-to-1 deals, a first-time buyer may exercise the sales option on a home as the sole buyer, so no ABSD is payable, but soon after, sells a one per cent share to a relative. The relative is then named as a co-owner and can jointly finance the property.

This arrangement enables an existing private homeowner to have a related party front the purchase of another property. The expectation is that the second owner will then pay only one per cent of the ABSD chargeable on the purchase of the additional home.

Reasons for co-owning

There may be nothing inherently wrong with any individual being a one per cent owner of a home.

Maybe a parent and a child or two siblings jointly own a home, possibly in the ratio of 99:1, because they want to cement their relationship.

After all, an entrepreneur may give family members and friends small stakes in a business, even if the beneficiaries do not actively contribute to the said business.

Also, helping a family member by being a co-owner of a home, in order to boost the borrowing capacity to fund a home purchase, is understandable.

Many parents want to help their children buy a home. Some may give or lend money to their children. Others may want to help via jointly taking up a home loan.

Application of ABSD

Perhaps, the way forward is to consider changing how ABSD is levied on family members who buy a home together.

Currently, when two persons with different ABSD profiles buy a home, the tax is levied at the rate of the person who needs to pay a higher rate.

For a couple comprising a Singapore citizen and a foreigner who jointly buy a S$1.5 million condominium unit as their first home, ABSD of 30 per cent is payable.

In the above case, buying the home in the sole name of the citizen results in saving ABSD of S$450,000.

If the above couple jointly buys a home under a 50:50 arrangement, maybe it is more equitable to apply the 30 per cent foreigner ABSD rate on a 50 per cent share.

Perhaps, for joint purchases of homes by family members, ABSD can be levied based on the percentage share of the home held by each buyer.

Importantly, setting aside tax considerations, jointly owning a home could be the preferred option for many foreigner-local couples as well as some parents and their offspring.

Risks of owning small stakes

While sound reasons exist for family members to jointly own a home, minority owners should be aware of potential risks. Take the case of two citizens who own a private home under a 95:5 arrangement.

First, things may get acrimonious when the minority owner wants to sell his share to the majority owner.

An independent valuation can be used to determine the price of the home. But, the 95 per cent owner may resist buying out the other party because the former’s cash situation is tight.

Second, if the 5 per cent owner dies and the deceased’s estate has multiple beneficiaries, those inheriting the 5 per cent stake could be landed with a burden.

While the beneficiaries work to sell the 5 per cent stake, their ability to buy a home is constrained, as the small shares of each beneficiary in the inherited home count towards the number of properties that each of these persons owns.

Third, while one can get pro-rata economic benefits from owning a small stake in a home, any stake held in a home counts towards the number of homes in which one is deemed to have an interest in.

A citizen holding a small stake in a private home as his first property needs to incur costs selling such a stake, before he can buy a private home as his sole property without incurring ABSD.

A citizen who owns a small share of a private home needs to sell such a stake and wait for 30 months to be able to buy a Build-To-Order flat from the Housing and Development Board (HDB). A wait-out period of 15 months may also apply to the said owner of a small share in a private home before he can buy an HDB resale flat.

While many people here strive to achieve their dream of owning their first home, some people dream of owning multiple homes. Are people who aspire to own multiple homes financially sensible or plain greedy?

The idea of enjoying passive rental income from owning other homes, besides one’s owner-occupied home, is alluring. Moreover, one may reap capital gains from an investment home.

However, beware that a dream can become a nightmare if the structuring of the ownership of multiple homes is not robust.

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