Buying property on Trust
What does it mean to buy trust property? Does it come with any advantages? Can you really avoid ABSD by buying property on trust? Is it safe to do so?
To tackle the ever-growing mess in the property market, the Singapore government introduced a string of regulations to maintain its balance.
Real estate investments not only have an impact on yourself but also on the market as a whole.
This is especially so in the case of residential property, which is unfortunately quite limited here.
Singaporeans wanting to buy their second or third property are charged with heavy taxes in additional buyers’ stamp duty.
Singapore citizens are charged 17 % of the purchase price on their second property and 25 % on any subsequent purchases.
On the other hand, Singapore permanent residents are charged 5 % ABSD on their first property, 25 % on the second and 30 % on third or subsequent purchases.
Let us give you an example to explain the volume of taxes charged on a property purchase.
Say you’ve bought a second home, a low-cost apartment for $ 500,000, which is a small price on its own.
However, if you consider the ABSD tax of 17 %, that’s $ 85,000 spent on just tax money.
As you can imagine, this can cause a tremendous financial strain, especially if you’re buying a detached terrace house or a semi-detached house.
This makes the overall ownership of private property a costly affair.
That’s why many Singaporeans today are switching to buying property on trust to benefit from tax transparency treatment.
This is the act of purchasing property while listing your children as the beneficial owner.
It technically allows you to own a separate property without adding it to your total property count.
But what’s the point of doing this, you ask? How does all of this help me financially?
Well, for starters, you will be exempt from paying any hefty ABSD tax, and your new property will be protected from creditors.
In this article, we will be going through the importance, benefits, advantages and everything else you need to know about buying property on trust.
What is a Trust?
A trust is an official arrangement that divides the ownership of a property between two individuals.
In this arrangement, one person, the trustee, holds the property for another person, the beneficiary, up to a specific period.
Even though the trustee is the one holding the trust property, the legal title of ownership is with the beneficiary.
Traditionally, the position of trustee is usually held by the parent.
The beneficiaries are generally children under the age of 21 who receive full ownership of the property after becoming a legal adult.
The creation of the trust arrangement is done by the previous owner, who may stay in the equation, taking the settlor’s role.
So if you purchase a flat on trust, the previous flat owner will be the settlor by default.
Alternatively, the settlor’s position can be taken by the beneficial owner themselves.
A trust can be established for any kind of immovable property, including any property for investment.
This consists of residential properties, industrial properties, real estate properties, cash, items of value, and company shares.
The act of owning property in trust often gets confused with a limited liability partnership; however, they are two completely separate arrangements.
Why should I consider a Trust?
Creating a Trust is not a requirement under any circumstance; however, it offers many benefits to the concerned parties.
Let us look at some of the most common reasons why people decide to use a Trust.
A Trust can safeguard the interests of beneficiaries who are vulnerable or too young
Trusts are usually created for children who are too young to understand financial terms or for those beneficiaries who are incapable of handling their financial matters.
A few common examples of incapable beneficiaries would be children with special needs or mental handicaps.
Alternatively, a trust can be created to protect the finances of beneficiaries who are extravagant spenders.
Such individuals are considered improvident and tend to be financial liabilities.
You might be thinking, why not just use a written will? As long as inheritances are concerned, a will can easily get the job done just as much as a Trust.
Well, let us remind you that the transfer of inheritance via a will is only possible after receiving a grant of probate by the court.
On the other hand, a Trust comes free of such legal delays.
A Trust can efficiently transfer or manage your wealth
A trust allows for specific rules and regulations to be enacted while conducting the transfer of wealth or assets.
Simply put, you can write down your own rules and instructions on how the assets are to be transferred.
Additionally, you can also set instructions for how the subject property or wealth is to be invested.
This makes it a great system to reliably safeguard your assets for the benefit of your children and grandchildren.
You can be confident that your property and health will be passed down to future generations without any complications.
A Trust can safeguard your assets in case of divorce or from creditors
Here’s a situation, let’s say you bought an apartment for your daughter and her new husband.
Even though you paid for the whole thing, the property was bought under joint ownership between your daughter and your son-in-law.
So technically, the property is now officially under your daughter’s and son-in-law’s names.
Unfortunately, the marriage didn’t last and resulted in divorce after only a few years.
Now, in this situation, the property will be split between your daughter and your ex-son-in-law.
What’s more, if, by any chance, your daughter were to pass away suddenly, the entire property would legally be transferred to your ex-son-in-law.
See the problem here?
If you had bought the apartment for your daughter beforehand using a standby trust, that property would be protected in a divorce situation.
This means that the apartment would solely belong to your daughter, and her husband would not be able to own any portion of it legally.
So naturally, in the case of divorce, the property stays protected under the ownership of your daughter.
Another advantage of Trusts is that the concerned property remains protected from any creditors.
So if you have any debts you cannot pay, the creditors are not allowed to collect the debt using the concerned property in Trust.
This is applicable in situations where the trust was created 5 years before an event of bankruptcy.
A Trust can help manage your taxes
Income generated from your assets under Trust can be routed to lower-income family members.
Since they belong to a lower tax rate category, the tax rate on your income will be lower.
Buy properties under a trust to avoid ABSD?
As we all know, Singapore citizens are required to pay ABSD tax to the Inland Revenue Authority of Singapore, for any secondary or subsequent property.
Paying this tax is a statutory duty, however, it does not apply if you are buying property in Trust.
Although buying property in Trust indeed allows you to avoid ABSD, it shouldn’t be misused.
Buying property in Trust should only be done to pass it down to your kids and not for any other ulterior motive.
If the government or concerned authority finds you guilty of foul play, you will most likely have to pay a penalty.
Not to mention, the ABSD tax for the concerned property will be applicable in full.
So, it is our recommendation not to misuse this loophole to avoid tax.
Moreover, there are a few other disadvantages to using a Trust arrangement.
For example, the concerned property will be added to your child’s property count.
So, if your child wishes to buy a property in the future, it will be considered as a second property, thereby applicable to ABSD tax.
What’s more, any trust income earned under your child’s name will be taxable income.
In any case, there has been a new regulation made by the Singapore government concerning ABSD in terms of property in trust.
As of 9th May 2022, all transfers of residential property into a living trust will now be chargeable for 35 % ABSD.
The reason behind setting up trusts
The primary reason for setting up trusts is to give parents the ability to gift an asset to their children at a specified time.
This is different from a will, where all the assets are given to the beneficiaries upon your death.
Some parents might not want their children to gain vast amounts of assets all at the same time.
This is especially true if the child does not have the maturity to handle their finances responsibly.
Trusts were designed to tackle such insecurities so that the beneficiaries can get their share at the right time.
By holding the property for your child on trust, you are still responsible for maintaining the asset.
This is because, by law, you are legally the owner of the asset, while your child, the beneficiary, will be the future owner.
As a trustee, you are allowed to make income from your child’s property as long as you pay income tax on it.
When will the trustee attain the legal title?
According to the legal framework, a trustee can attain the legal title once the trust has been initiated.
He/She will be responsible for maintaining the asset and will be liable to pay taxes on it.
The trustee can invest the property as they wish as long as it is mentioned in the trust deed.
How much does it cost to set up a trust?
The cost of setting up the trust depends on how simple or complicated the chosen arrangements are.
Additionally, it depends on the quality of the law firm and property manager, if any.
On top of paying property tax, you will be liable to pay the fees of the property management fees as well.
The overall cost can be somewhere around a few thousand dollars for simple cases, while the cost can skyrocket to a range of 20,000 $-30,000 $ or more.
Properties can be Trust properties?
Under the structure of a trust arrangement, any property purchased for the purpose of passing it down to a beneficiary can be considered trust property.
So basically, any property owned by the trustee, on behalf of the beneficiary, is a trust property.
If the trust contains assets belonging to a company with a paid-up capital of more than 0.5 million $, that company has to be registered with the Singapore Business Federation.
What are some features of Trusts?
The particulars of any Trust in Singapore are regulated by the Trustees Act which was revised in the year 2004.
The trust law is a modernised version of English trust law while maintaining some of the conservative features.
The Singapore trust law is the framework for efficiently handling all the particulars that are present within a Trust.
Singapore trust law permits all powers of investment for the settlor, giving him/her the ability to make investment choices with the property.
Foreign forced heirship laws have no jurisdiction when it comes to Singapore trusts.
This is true even if the settlor somehow manages to transfer the property away from the original trust jurisdiction.
What’s more, there is a statutory duty is thrust upon the trustees when it comes to using their powers.
Non-residents of Singapore can also avail the benefits of a Singapore trust in the form of a Qualifying foreign trust (QFT).
An advantage here is that QFTs are spared from Singapore taxes on income derived from certain specific investments.
These may include foreign currency stocks or shares from a foreign company, and securities from foreign currency denominations outside Singapore.
Also, any foreign currency futures contracts, immovable property outside Singapore and transactions done in the foreign exchange (non-Singapore currency).
Singapore has a vast network of double tax treaties with more than 70 countries worldwide, this provides opportunities for clients to create tax planning.
Singapore also provides tax neutrality to foreign settlors and beneficiaries of QFTs.
Professional trust companies offering their services will have to get a license from the Monetary Authority of Singapore.
Moreover, the TCA enforces strict confidentiality laws that prevent the trustees from disclosing the affairs of their clients.
For better management of property trust, some families switch to a Private Trust company (PTC).
This is usually done in the case of a big family with plenty of beneficiaries to look after. Rather than appear as a family, a PTC can act as corporate trustees.
This is helpful for families as they help them enjoy more control over trust assets, along with more privacy regarding the trust.
What’s more, a PTC can help train future generations of a family to be well versed in the particulars of the trust.
Additionally, the laws of property in trust are slightly different when it comes to Variable Capital Companies or VCCs.
Ever since the enactment of the Variable Capital Companies act in 2018, a VCC is considered as a corporate entity and shares all of the characteristics of a corporate company.
This means that most investment funds can now be considered corporate companies.
However, there is still the issue of umbrella funds, which usually hold multiple sub-funds with separate assets.
According to the new law, both umbrella funds and single funds will be seen as one single corporate entity with no distinctions whatsoever.
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