The Straits Times, 19 June 2022, Sun 5:00 AM

By Tan Ooi Boon

SINGAPORE – Impose a tax and it’s pretty certain someone will devise a loophole, as is happening here, with crafty investors avoiding an anti-property speculation levy by allowing one buyer to own 99 per cent of a home while the other holds just 1 per cent.

While some believe this ownership set-up will help them save money when they want to buy more properties later, others are being misled by over-zealous real estate agents who have been giving faulty tax advice.

The tax regime states that citizens buying their first home do not have to pay additional buyer’s stamp duty (ABSD), which is levied at 17 per cent on the second purchase and 25 per cent on subsequent ones.

But it seems some agents have been telling buyers that they can pay minimal tax if they register themselves as the “1 per cent owner” while their children, being first-time buyers, own the other 99 per cent of the home.

These one-percenters believe they would need to pay the ABSD based only on their tiny share. Take a property costing $1 million. A 1 per cent share of the purchase price is $10,000 so the amount of ABSD would be just $1,700 to $2,500, right?

Wrong. That is not how the taxman calculates ABSD. Joint buyers are collectively liable for the full amount of ABSD as one of them owns a property. The percentage of ownership is never a consideration.

This means that even if an existing home owner takes a 1 per cent share in the new $1 million property, he will be liable for $170,000 in ABSD if it is his second purchase, or $250,000 if he already owns more than two.

A lawyer specialising in real estate matters told Invest: “Property agents often advise buyers to hold their property in the proportion 99-to-1 to get around paying ABSD.

“I recall vividly a period recently when within the space of a few days, I was told this by about five different clients.”

Indeed, a woman who already owned two properties instructed the lawyer to help her get the paperwork done for the purchase of a new condominium unit under construction. Apparently the property agent had told her that she could hold 1 per cent while her two children could own the remaining 99 per cent.

The lawyer says: “I highlighted to her that the amount of ABSD payable would be more than $200,000 but received no response. I assumed she was prepared to pay the ABSD since she was a person of means.”

It was only when she met the lawyer later to write a cheque for the stamp duty that she realised she could not avoid paying the enormous amount of ABSD due to her ownership of other properties.

“It was fortunate we were able to unravel the transaction after writing to the Controller of Housing,” said the lawyer, noting that the authorities allowed the woman to withdraw her name from the deal due to her mistaken belief that she would not need to pay the whole ABSD.

Mr Alfred Chia, chief executive of financial advisory firm SingCapital, notes that some married Singapore couples who are first-time buyers also choose to buy property under the 99-to-1 ratio, even though they don’t need to pay ABSD.

They do this to prepare for a possible “de-coupling” a few years down the road, he adds.

The term refers to a popular move by couples wanting to avoid paying ABSD for a second purchase, by allowing one spouse to take total ownership of the existing property so that the other spouse is free to buy another as a first-time buyer.

In such cases, the spouse who owns the 99 per cent stake will “buy” the remaining 1 per cent share. The usual stamp duty for a property transaction is payable but it will be nominal due to the small value of the share.

There are three points for buyers to note. You can use the 99-to-1 ratio to save on taxes for future property investments but you should be aware of these issues that can affect your plans.

1. More cash needed

The person holding the 1 per cent share is likely to be the one with more money because this owner is meant to buy a second property on his own.

If you have used money from your Central Provident Fund (CPF) to buy this property, you have to refund this sum plus accrued interest if you give up your share. While you can use this sum again for the next property, you still need to have enough cash to make the refund first.

If there is a mortgage on the first property, the sole owner must be able to meet the loan requirements alone after buying the 1 per cent. Otherwise, you may have to remain as a co-borrower for this property, which may affect your ability to get a fresh mortgage for the new home if you do not have sufficient cash to reduce the loan quantum.

Mr Chia says: “Couples who make such plans should ask whether their respective incomes would allow them to own two properties based on the current financing regime.”

Banks can provide fresh home loans only if the borrower’s monthly debt obligation is 55 per cent or lower than their gross monthly income.

2. Legal ownership

It is prudent for all property owners to have wills so that their assets can be passed on to their chosen beneficiaries should anything happen to them.

This is especially so if the owners choose to hold properties in grossly unequal shares of 99 and 1 per cent. Without wills, the shares will pass on to their respective families and not to each other if they are not related or married.

Even if they are married, there is a risk of dispute on who actually owns the lion’s share of the property if the relationship breaks down. As one lawyer puts it, buyers should consider all the possible risks and decide whether such manner of holding is worth it just to save a few thousand dollars in taxes.

After all, equal owners can also choose to decouple – they pay about $9,600 in taxes if they transfer a half share of a $1 million property to each other.

3. Rising mortgage rates

The Monetary Authority of Singapore has already advised home buyers to exercise caution before taking out more loans for property investments because of impending rate hikes.

As it is, the fixed mortgage rate of some banks here is already more than the 2.5 per cent interest rate of the CPF. So borrowers are likely to use more money from the CPF to service their loan and this will impact their retirement savings.

More importantly, buyers should do their sums carefully to ensure that they have excess cash to service two or more mortgage payments, especially when borrowing costs are expected to increase for all such loans.

When this happens, you should worry less about saving on taxes but more about how you can manage your cash flow so that it does not eat into your retirement plans.

Source: https://www.straitstimes.com/business/invest/the-risks-of-buying-properties-in-99-to-1-share