For most people, a residential property is first and foremost a home—a roof over their heads. Many buyers also view property purchase as a form of investment, and some parents buy property for their children through a trust. This article will explore the main purposes of buying property under a trust and the implications of the new Additional Buyer’s Stamp Duty (Trust) rules introduced in May 2022.
1. Why Buy a Property Under a Trust?
Although a child (i.e., an individual under 21 years of age) does not yet have the legal capacity to own property in their own name, their parents can purchase a property for them under a trust and hold it on their behalf. By doing so, the child becomes the beneficial owner of the property.
Some parents choose to use a trust structure to purchase property for their children for various reasons, primarily for more effective and legitimate tax avoidance and for succession planning.
Other parents opt to buy property for their children through a trust because they wish to pass on residential property to their children, especially minors, during their lifetime, rather than waiting until after their death to transfer these assets.
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2. Who Can Buy a Property Under a Trust?
Given that purchasing a residential property under a trust typically requires full payment in cash, prudent financial planning and substantial funds are crucial considerations for those looking to benefit their children through this method. In other words, those who buy property under a trust are often cash-rich.
Once these factors are considered, buying a property for children under a trust is a viable option for those looking into early inheritance, tax considerations, or succession planning.
3. How to Buy a Property Under a Trust? What Are the Steps and Requirements?
Generally, a trust is established by a trustee as follows:
- Signing a trust instrument or a trust deed; and
- Transferring the assets into the trust.
When executing the trust deed, the trustee or settlor must clearly decide on the key terms of the trust, which include:
- Who the beneficiary is;
- Who will be appointed as the trustee of the trust;
- The powers that the trustee will have; and
- The vesting of the beneficial interest.
When buying a property under a trust, the purchase price must be paid in full with cash. Central Provident Fund (CPF) savings cannot be used for payment, and banks cannot provide a loan for it.
4. The Government Recently Introduced the Additional Buyer’s Stamp Duty (Trust). What Does This Mean and How Does It Affect Buying Property Under a Trust?
The Ministry of Finance (MOF) announced that starting from May 9, 2022, all transfers of residential property into a living trust will be subject to a 35% Additional Buyer’s Stamp Duty (ABSD). This 35% ABSD (Trust) must be paid upfront (i.e., within 14 days of executing the sale and purchase agreement or exercising the option to purchase).
Previously, when a residential property was transferred into a living trust, ABSD was not payable if there was no identifiable beneficial owner. This rule change arguably closes a potential policy loophole.
However, the trustee can apply to the Inland Revenue Authority of Singapore (IRAS) for a refund of the ABSD (Trust), subject to several conditions being met – namely, that the beneficial owner of the property is an identifiable individual, the beneficial ownership has vested in the beneficiary, and the trust cannot be revoked, varied, or subject to any subsequent conditions.
According to IRAS regulations, when a residential property is sold to one or more identifiable individual beneficiaries, the ABSD (Trust) may be remitted by way of a refund.
If the conditions are met, the refund amount will be calculated based on the difference between the 35% ABSD (Trust) rate and the ABSD rate corresponding to the beneficiary’s profile.
The 35% ABSD (Trust) must be paid upfront, and an application for a refund must be made to IRAS within six months after the instrument is executed. Most applications are processed within 2 months of receiving the complete information, and if approved, the refund will be issued within 1 month of approval.
The government introduced the ABSD (Trust) to prevent situations where people use others’ names to buy property to evade paying ABSD. Therefore, the beneficial ownership of the property must vest in the beneficiary, which ensures that the beneficiary becomes the true owner of the asset and that the property is not actually controlled by the person who created the trust.
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5. Under the New Rules, Does It Still Make Sense to Buy Residential Property Under a Trust?
The ABSD (Trust) is not expected to have a significant impact on the broader residential market. Of the large number of private residential unit transactions each year, properties purchased under a trust account for only a small fraction. It is estimated that about 10% or fewer private home buyers purchase property under a trust to secure their children’s interests.
Most buyers who purchase property under a trust for the benefit of their children will name their children or family members as beneficiaries. Since the net effect on these trust structures is neutral because they can apply to IRAS for a tax refund, the trend of using trusts to purchase residential property is likely to continue. Furthermore, buyers who purchase property under a trust are often wealthy, and the 35% upfront payment (which they may eventually get back) is unlikely to be a major deterrent compared to the potential tax savings from avoiding ABSD, which can be substantial.
Therefore, the deterrent effect of this ABSD (Trust) levy is limited. For those who can afford it, buying property under a trust remains attractive. If they meet certain conditions—for example, the identifiable beneficiary is a Singapore citizen and does not own any other residential property in Singapore—the additional tax will be fully refunded anyway.
In summary, trusts are established for gifting, tax considerations, and estate/succession planning, and the implementation of the new ABSD (Trust) does not change this fundamental purpose.
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