8 December 2017 - Property investors often use companies to hold real estate because personal property ownership could get expensive: when treating property as an investment, a small percentage difference in taxes between company and personal ownership can translate into a difference of millions of dollars. Using holding companies to transfer the ownership of properties is therefore a sought-after tactic to reduce taxes. But—is it for you? We look at the pros and cons of using companies to buy and transfer property.
Save on Stamp Duty
Avoid the extra taxes imposed on personal home buyers by buying property through the transfer of company shares. If you’re buying property as an individual for the first time, you will have to pay ad valorem stamp duty (AVD) of up to 4.25% —compared to the 0.2% stamp duty for purchasing or selling a company. If you’re a second home buyer, you’ll have to pay a 15% AVD. On top of that, if you’re a personal owner reselling your property within 36 months of purchasing it, you would have to pay Special Stamp Duty (SSD) of up to 15% based on how quickly it was sold. And buyers who are not Hong Kong permanent residents are liable for an additional Buyer’s Stamp Duty (BSD) charged at a flat rate of 15%. The BSD also applies to companies, since a company is not a Hong Kong permanent resident, even if the owners of the company are themselves permanent residents. (This is why it is no longer attractive to create a company to purchase a property, since it automatically triggers the 15% BSD.)
It comes as no surprise that residential properties in Hong Kong’s luxury housing market are sometimes transferred through company shares. As much as 45% in taxes (valued up to HK$180 million) was avoided in a single property transaction when a free-standing home in Kowloon —complete with a yard and swimming pool—was sold through a British Virgin Islands-registered company in November 2016.
Risks of acquiring the liabilities of a company
Property investors who acquire the shares of companies face investment risks including hidden debts. Thorough due diligence by your lawyer should be conducted before any company acquisitions to ensure the company being acquired doesn’t own other assets or have other liabilities.
Cost of acquiring and maintaining a company
When acquiring a company-owned property, your lawyers will not only need to conduct due diligence on the property (to check for encumbrances), but also on the company being purchased (to ensure it doesn’t have other assets/liabilities as described above). Thus the legal costs for acquiring a company-owned property are higher than when purchasing a property directly. In terms of ongoing maintenance costs for the holding company, Davy Yun, a tax partner with Deloitte China, told the South China Morning Post that Hong Kong shelf companies typically face annual costs of around HK$10,000 to HK$40,000 (including audited financial statements). The actual costs depend on the service provider and the number of properties the company holds (though generally a company being sold will only own one property).
Difficulty in obtaining a mortgage
Banks tend to be reluctant to offer mortgages for property purchases involving the transfer of company shares due to legal complexity and risks, which means investors who purchase company-owned properties may have higher upfront cash costs. In respect of a mortgage, some banks offer packaged bridging loans for company purchases (at a higher interest rate). After completion (usually 2-4 weeks), this loan is converted into a mortgage. The % mortgage may vary but people buying company-owned properties are recommended to speak with banks directly about potential solutions.
Purchasing companies through the transfer of company shares can be a great way to reduce property taxes— if you have enough cash to fund the purchase initially, and if the costs of managing the company are small relative to the stamp duty that would otherwise be payable. As a first-time home buyer or property investor you may be better off simply accepting the applicable stamp duties (while being aware of them and structuring your purchase to minimize them).
Disclaimer: The information provided above is for informational purposes only and does not constitute tax or legal advice. You should contact your attorney to obtain advice in respect to any particular issue or problem.