Buy Property Under Trust in Singapore
Learn more on how you can buy a property in Singapore under Trust. What is a Trust and can you use a Trust to avoid paying ABSD? What are the implications?
Introduction to Trust
Additional Buyer’s Stamp Duty was introduced by the Singapore government as part of its property cooling measures. Depending on the nationality of the buyer, and the number of properties owned by the buyer, ABSD could be payable.
A trust is a form of divided ownership where one person is registered as the owner of the property but is supposed to hold it on behalf of another person.
In a trust, ownership is divided into legal ownership and beneficial ownership. The legal owner is the person who is registered as the owner of the asset (which could be real estate, shares, or anything else).
We find examples of trusts in everyday life. The most famous example would be the Central Provident Fund or CPF. Under the CPF Act, a Singaporean’s CPF account which is meant for retirement purposes, is held by the CPF Board. The Board is the trustee and the Singaporean is the beneficial owner of his account. This is an example of a trust set up by statute.
Most trusts are created by a branch of law called equity which is based on fairness and justice. Therefore, anyone trying to use trust law must have acted fairly and justly. The courts will often refuse to enforce a trust which is designed to deceive or mislead someone. All readers should note that there are restrictions in the Housing and Development Board Act and the Residential Property Act relating to the use of trust. Consult your lawyer if you have any doubts.
There are 3 parties to a trust –
a) Settlor – the person putting assets into the trust
b) Trustee (or legal owner) – person managing the assets. He could also be the settlor
c) Beneficiary – the person entitled to the benefits of the assets in the trust
Advantages of a Trust
If you buy property in the name of a beneficiary who otherwise does not own property, then there is no ABSD payable. So for example, father and mother John and Mary decide to purchase an apartment in Bishan in the name of their daughter Joanne, assuming Joanne has no other property, then no ABSD is payable.
VERY IMPORTANT – Joanne, the daughter, could be just 3 years old. It does not matter. Using a trust arrangement, you can buy property for practically anyone. Well, maybe not for your dog or cat but for any human, no matter how young that person is.
As far as the law is concerned, the real owner of the property is the beneficiary and not the trustee.
Another advantage of a trust is that since the courts regards the child as the beneficiary, if the parents should become bankrupt many years after the trust is created, the child’s ownership is safe from the parents’ creditors. The parents would not be able to act as trustees but some other relative could step it. Note that under the Bankruptcy Act, any gifts within 5 years of a person becoming bankrupt might be cancelled by the relevant bankruptcy official (usually the Official Assignee).
Disadvantage of a Trust
One major disadvantage of a trust for a child Is that no loans are granted by banks on the property. This is because the law looks at who the real owner of the property is. The real owner is the beneficiary. For a bank mortgage, the real owner must sign the loan documents. Where the real owner is a child, then it is not possible for a child to sign the mortgage. To use legal jargon, the child lacks legal capacity.
This does not mean that no bank loan is possible. It only means that the parents of the child must use other resources to convince the bank to lend money to them. For example, if they own another fully paid property, it might be possible to persuade the bank to take a mortgage over this property in order to obtain a loan to buy another property for their child.
Another disadvantage of a trust is that the trustee is not the owner. A trustee is only a property or asset manager. The real owner of the asset is the beneficiary. This also means that when the child beneficiary becomes an adult and wishes to buy, say an HDB flat, the property in the trust is counted as property owned by the beneficiary. If the beneficiary also wishes to buy another property, then that would be the beneficiary’s second property and thus ABSD is payable.
Content of a Trust
The Trust Deed is the document that spells out the relationship between the Trustee and the Beneficiary. It is usually professionally drafted by lawyers who effect a property purchase.
Some important details the trust deed should contain –
a] Name and identification details of the trustee(s)
b] Name and identification details of the beneficiary
c] Details of the assets under the trust (for real estate, the address of the property and state and country if the property is overseas. For shares, the number of shares as well as the name of the company as its country of incorporation and registration number).
d] Powers of the trustee – They should include wide powers to deal with the assets including renting real estate, selling trust assets and dealing with all legal matters relating to the assets.
Buying Property Under Trust
What happens when my beneficiary who is now a child later becomes an adult?
Answer – Since your child is the real owner, your child can require that you remove your name on the title deeds and share certificates belonging to your child. In general, major stamp duty (what lawyers called ad valorem) is only payable for changes in beneficial interests. Since your child was the beneficial owner from the start, changing the name of the legal owner involved no change in beneficial ownership. Therefore, only minor amount of stamp duty is payable.
Can I cancel the trust as I am the settlor?
Answer – No, you cannot cancel it as the beneficiary is now the owner. It might be possible to put in a clause in the trust deed giving the settlor the right to cancel the trust but it is very likely that the court will decide that the trust is not a genuine trust. You may also face problems with IRAS.
What are my duties as a trustee?
Answer – The law of equity imposes fiduciary duties on a trustee. One of the most important duties is not to put himself in a conflict of interest position. This means that the trustee should not make any profit or obtain directly or indirectly any benefit from this trusteeship. However, if the trust deed allows a trustee to charge fees, the amount should be clearly stated. Trustees should be aware of any income tax implications as regards with such fees. In order to avoid any legal disputes with your beneficiary in future, it would be wise to have a separate bank account for all income and expenses relating to the trust assets. For example, all rentals should go into this account. Expenses relating to the trust assets, e.g. property tax, etc should also come from this account. Funds from the account can also be used for the beneficiary’s benefit, eg for education and holidays.
Some trustee may be worried about lawsuits from their beneficiaries at a later date. A well drafted trust deed should have an exemption clause which will exempt the trustee for any breaches of duty relating to negligence. It is unlikely however that any deliberate thefts of trust assets could be protected by an exemption clause. MORAL of the story – do not steal your child’s monies or assets.
Can I create a trust for more than 1 beneficiary?
Answer – Yes, you can have more than 1 beneficiary.
Can my beneficiary be an adult? Answer – Yes, this is possible. Trusts are sometime used for adults for tax planning purposes.
What happens if a trustee dies, becomes bankrupt or mentally incapacitated?
Answer – An application could be made to court by another person such as a close friend or relative to be appointed as a replacement trustee.
Can I create a trust over overseas assets?
Answer – The law in different countries differs considerably. If the country was formerly a British colony, then common law would have applied and it is likely that the concept of a trust is recognized. Examples of such countries – Australia, New Zealand, Canada, Malaysia. However, some countries may restrict foreign ownership of real estate and you are advised to consult lawyers in the particular country.
For more information, you can visit IRAS Website to explain more on Trust and Taxes.
Stamp Duty & Housing Loan
Stamp Duty is the tax levied on legal documents, usually in the transfer of assets or property. Based on the Singapore Property Launch, here’s a useful guide that shows the stamp duty rates and housing loan* for residential properties.
- 80% LTV is allowable for owners of HDB flats (with outstanding loan) upgrading to new ECs (purchased from developers) or buying another HDB flat; provided borrower does not have other loan to his name & he is providing a Letter of Undertaking to Sell his HDB flat to the bank
- ABSD Remission for a SC household purchasing a HDB flat or new EC (apply through HDB)
- ABSD Refund for Singaporean Married Couples on purchase of 2nd residential property; provided the 1st property is sold within 6 months from the purchase date of the 2nd property (completed property) or TOP/CSC (whichever earlier) (uncompleted property). Application is through the Commissioner of Stamp Duties
To learn more about stamp duties and how they may play a part in property tax, click here
*Updated 16th January 2020