Introduction

The recent modification in the stamp duty rules following the announcement made by the Ministry of Finance (MOF) on 8 May 2022 caused a significant stir in the real estate sector. Since the update, we have received countless enquiries from individuals who are seeking clarification on the new rules. In this article, we aim to provide a breakdown on the new rules for your easy understanding.

Purchase of Property via Trust based on Beneficiary’s Profile

ABSD liability is dependent on the profile of the purchaser. When you purchase a property in trust for a beneficiary, the ABSD liability is dependent on the profile of the beneficiary, not the trustee or the settlor. It used to be the case that ABSD is not required upfront if it is a case that the beneficial owner under a trust structure is not affected by ABSD. To clarify, if the beneficiary is a Singapore citizen acquiring his or her first property in Singapore, you need not prepare any monies to pay for ABSD.

[1] Nett ABSD is (1) the ABSD payable based on the beneficiary’s profile before 9 May 2022, or (2) the 35% ABSD (Trust) payable less the remission amount based on the beneficiary’s profile on or after 9 May 2022.

Latest ABSD Rules and Regulations

However, with the introduction of the ABSD (Trust) rules which was announced on 9 May 2022, ABSD at a flat rate of 35% of the purchase price now applies to all residential properties or interest in residential properties that are transferred into trusts on or after 9 May 2022. This means that 35% of the property price is payable upfront to the Inland Revenue Authority of Singapore (IRAS), regardless of the profile of the beneficiary.

Nevertheless, if the following remission conditions are met, you may be entitled to request for remission of ABSD:-

1. The residential property is held on trust for one or more identifiable individual beneficiaries;
2. ABSD (being 35% of the purchase price) has been paid upfront; and
3. Claim for the refund of the ABSD paid is made to the Inland Revenue Authority of Singapore (“IRAS”) within 6 months after the date of execution of the Sale and Purchase Agreement or the acceptance to the Option to Purchase (whichever is applicable).

Where remission has been granted by IRAS, part[2] or all of the ABSD (Trust) paid will be refunded. The amount refunded will be based on the difference between the ABSD (Trust) paid and the ABSD payable based on the profile of the beneficiary of the property at the time of the transaction.

To illustrate the difference in procedure before and after the implementation of the ABSD (Trust) rules:-

[2] Whether the ABSD (Trust) is refunded in all or in part is dependent on the beneficiary’s profile. For example, if the beneficiary is a Singapore Citizen acquiring a first property, then ABSD (Trust) will be refunded in full if the remission application is approved. If the beneficiary is a Singapore Permanent Resident acquiring a first property, then amount refunded will be the ABSD (Trust) less 5% ABSD based on the beneficiary’s status.

Identifiable Individual Beneficiary

According to IRAS, an identifiable individual beneficiary is an individual who is identified in the declaration of trust as a beneficiary of the property and who because of the trust, has beneficial ownership of the property.

They have also clarified and said that the following are not acknowledged as an identifiable individual beneficiary: –

1. An individual who has not been born on the date of declaration of the trust;
2. An individual who is entitled only to the income of the property under the trustt
3. An individual whose estate or interest in the property under the trust is contingent or discretionary interest, or who becomes entitled to an estate or interest in the property only upon revocation of the trust; or
4. An individual who is entitled to any estate or interest in property in remainder or reversion.

Trust Deed

IRAS has also stated that the trust in question must also not be revocable, variable or subject to any condition subsequent.

For example, a trust deed could be structured in a way where a certain set of conditions (i.e. getting married by a certain age, graduating from university) needs to be fulfilled before the beneficiary is entitled to his or her interest in the property. Because of the unfulfilled conditions attached, the beneficiary will not be regarded as an identifiable individual. In these cases, the trustee would not be entitled to the refund.

Effects of New ABSD (Rule)

This new rule may have been implemented in anticipation of more foreign capital coming to invest in Singapore, especially in the real estate market. In addition, there is also an increase in the number of wealthy individuals interested in buying a property for their children for estate planning purposes.  By purchasing the property through trust, they may save on the overall nett ABSD payable on the purchase of the property.

So, what does this new rule entail?

This new rule requires prospective purchasers to have more cash on hand to purchase a property in trust. When you purchase a property in trust, you are unable to utilise your CPF monies or take a bank loan to finance the purchase. With the newly implemented rule, settlors would have to fork out another 35% of the purchase price. Further, we note that the refund of part or whole of the 35% ABSD is not immediate. This would mean that more individuals would not be able to afford purchasing real estate in Singapore on trust, and we foresee a substantial drop in the number of transactions involving a purchase in trust which is also in line with the recent slew of cooling measures the Singapore government has introduced lately to slow down the real estate market.

In addition, this new rule necessitates a carefully drafted trust deed or a declaration of trust, in order to qualify for the remission criteria set forth by IRAS as there can be instances where the trustee will not be entitled to the refund under the new law.

Conclusion

As such, one should always seek proper legal advice as to whether it is advisable to purchase a property in trust for another. This is especially so, in view of the recent changes implemented by the Singapore government. Here at Sim Mong Teck & Partners, we strive to ensure that the trust arrangement is drafted in accordance to the law, including the newest change implemented by IRAS.