3 March 2017 - In its current iteration, the recently introduced Ad Valorem Stamp Duty (AVD) mandates a 15 per cent flat rate for all residential property transactions in Hong Kong. Unless provided otherwise or specifically exempted as a permanent Hong Kong resident and a first time home buyer, additional rates may apply. Case in point, as an overseas buyer looking to break into the Hong Kong real estate market, in tandem with the AVD, the Buyer’s Stamp Duty imposes an additional 15 per cent, ratcheting up the total cost of purchase by 30 per cent.
Looking to market sentiment, the immediate reaction to the rate increase was characterized by an abrupt slump in demand, buyers defaulting on their agreements and developers suspending unit sales across property projects. Yet the outlook two months on paints a completely different picture, with a clear uptake of property prices and resurgent buyer demand in the primary market , or more aptly the luxury property sector. Though we cannot attribute continued demand within the Hong Kong property market to be brought on by loopholes within the current regulatory regime, we can nonetheless look to the means by which buyers in the market have sought to dampen the costs of the stamp duty.
1. Buying Multiple Properties
According to the Inland Revenue Department, the scope of charge within the stamp duty extends to the total value of each instrument. In effect, if a single contract of sale involved multiple residential properties, for all intents and purposes they will be treated as a single instrument. What this translates to for first time home buyers who are Hong Kong permanent residents, is a lower tax rate levied on the purchase of multiple properties that would otherwise be subject to the 15 per cent flat rate.
It is important to note that as the charges levied are subject to the tax authority’s interpretation and concrete guidelines have yet to be issued, this option does not stand on firm legal ground. Nonetheless, referencing Edwin Leong’s case – a billionaire who purchased three luxury apartments on the same day and was subject to the lower tax bracket despite owning multiple properties through his company, the exercise of this option does have market precedent.
2. Having Company Ownership
Edwin Leong’s example also illustrates another means to not only fall under the first-time exemption within the Stamp Duty Ordinance but also avoid the flat rate all together – property ownership via a shell company. As tried and tested tax avoidance vehicles, according to government data and further reported on by Bloomberg, in 2011 the majority of Hong Kong homes worth over HKD20 million were sold via companies.
Buying a shell company which effectively owns the property ultimately nets significant savings, for the costs associated with share transfer only incurs a 0.2 per cent stamp duty. That being said, the required due diligence and potentially complicated legal wrangling does deter the majority of buyers from opting in.
3. Taking Advantage of Developer’s Subsidies
According to Centaline Property Agency, the majority of developers in Hong Kong subsidize 70 per cent of the payable stamp duty. Looking to Cheung Kong Property Holdings and their recent development Crescendo in Yuen Long, they are willing to cut profit margins and subsidize 100 per cent of the stamp duty levied on eight luxury villas. Though promotions for other units in the development do not waive the stamp duty in its entirety, steep discounts are nonetheless proffered to take the sting out of associated costs.
While this applies exclusively to property sales within the primary market, potential buyers can keep an eye on and consider investing in flats within new developments as developers offer up significant cost incentives to drum up sales figures.