When the stamp duty is so high, why do investors still buy properties under holding companies? Should I do the same?

Investment Vehicles Properties

Share This Post

Share on facebook
Share on linkedin
Share on twitter
Share on email

Why are investors willing to pay 30% stamp duty when buying a property simply to hold it under a company? Should individual investors do the same? In 2017, a corporate buyer paid a total of HK$ 324 million of stamp duty for a luxury house on the peak. Why would someone be willing to do that?

MyPropty works with a variety of small-to-medium landlords – some professional investors and some traditional families. Most of them have been investing in real estate long before the stamp duty regulation for company-held properties started. But their investment strategies vary significantly based on their short-term and long-term goals, as well as their organization structure.

Let’s start by understanding the benefits and drawbacks of buying a residential property under a holding company.

Summary

Benefits

Drawbacks

Much cheaper to sell and exit

Extremely high acquisition cost

Independent of any individual and allows multiple shareholders easily

Potentially higher legal fees by lawyers as more due diligence is needed

Tax benefits by putting expenses against company’s profits

Annual maintenance of owning a company

No Special Stamp Duty payable even if you sell within 3 years

Predictability on duties for a long time horizon

Anonymity for overseas company holders (BVI, Cayman, etc.)

Drawbacks of buying/owning a property under a company:

1. Extremely high acquisition cost

The acquisition cost of a property under a holding company is very high. Buying a property as:

  • An individual (who also owns other properties) will cost 15% duty (Ad Valorem Duty).
  • A company will cost 30% duty (Ad Valorem Duty + Buyer’s Stamp Duty).

When purchasing in one of the most expensive real estate markets in this world, this additional 15% adds up.

Check out our introduction to Buyer’s Stamp Duty for further information.

 

2. Potentially higher legal fees by lawyers as more due diligence is needed

Lawyers may need to go through more due diligence when handling the purchase of a company held property. This depends on a case-by-case basis, but usually:

  • If the property is held under a clean Hong Kong company title, it will be quite routine and won’t cost much more
  • If it has a complicated legal structure, the holding company is off-shore, or if the bookkeeping has issues, the legal fees can increase significantly.
 
3. Annual maintenance of owning a company

Hong Kong is one of the easiest and cheapest places to own and manage a company. However, there are still standard regulations that must be followed when owning a company here. These include paying for business registrations, auditing accounts, etc.

This is very minimal and the fees are tax deductible against the profits of the company. But it is something to be aware of.

Benefits of buying/owning a property under a company

1. Much cheaper to sell and exit

When selling the property, the total stamp duty to be paid by both parties is only 0.2% (Share Transfer Duty). This makes the acquisition cost extremely low for the buyer. Sellers typically can charge a premium for owning the property under a company because the stamp duty payable is so low.

When the property is acquired, investors clearly understand their current financial position. However, compared to other asset classes, such as bonds and equities, properties are very illiquid. Investors don’t know exactly when they will be able to sell their assets. By owning the property under a company entity, there are fewer hurdles when selling their properties, making it easier to exit their investment position.

It is estimated that between 2010-2018, HK$ 9.4 billion went untaxed due to this loophole of company-held properties.

 

2. Independent of any individual and allows multiple shareholders easily

When a property is owned by an individual, he/she can take out additional loans and use the property as collateral, can decide if and when to sell the property, and basically has full decision making ability when it comes to the property.

However, there are often multiple shareholders of properties and it isn’t safe to put so much trust in one person, for such a large value, for such a long period of time. This may be possible in family settings, but not much beyond that.

Holding the property under a company will ensure that the properties will be managed under a formal process and there will be a decision maker for the company too.

 

3. Tax benefits by putting expenses against company’s profits

When you hold the property under a company, you can reduce your tax expenditure by applying many expenses against the company’s profits. For example, when you renovate a property, all those expenses are “company costs” which can be used to offset the profits of the company. However, for an individual, these renovation expenses are not tax deductible.

Additionally, income tax in Hong Kong is on a progressive scale whereas company profits tax is a flat rate. If you own properties as an individual, there is a threshold where you will begin to pay a higher tax rate on rental income than if the property was held under a company.

This is an extremely simplified assessment of the tax implications for your property portfolio. If you need more details, contact us.

 

4. No Special Stamp Duty payable even if you sell within 3 years

Hong Kong implemented a Special Stamp Duty which is payable on residential properties if it is sold within 3 years of the purchase date. This was created to reduce speculation and flipping of residential properties as this was negatively impacting residents. This SSD can be up to 10-20% of the selling price.

For company-held properties, this is not applicable. After the sale, the property will still be owned by the same company. The shareholders of the company will have simply changed. This is why the 0.2% is referred to as a Share Transfer Duty.

 

5. Predictability on duties for a long time horizon

The government occasionally does change stamp duty regulation. If properties are held for long periods of time, there is no guarantee what the stamp duty rates will be when you eventually sell your property. Companies will always have significantly lower tax rates on share transfers. Owning a property under a company will allow you to make cash flow projections for your business more easily.

 

6. Anonymity for overseas company holders (BVI, Cayman, etc.)

It is easier for the purchaser to remain anonymous if the property is purchased under an entity that is owned by an overseas company, such as BVI, Cayman, etc. It is much tougher to do background and director checks for overseas entities.

 

How does this all relate to me? What should I do?

If you are a professional investor (Real Estate Fund, Listed Company, etc.), you have to purchase your properties under holding companies (but you probably already knew that).

 

If you are looking to flip properties by purchasing, redeveloping or renovating, and selling the unit subsequently in a short period of time, you will also want to hold your property under a holding company. Owning the property under a company will allow you to:

  • avoid paying Special Stamp Duty
  • enjoy tax deductions on all renovation expenses for the property
  • pay higher percentage duty on a lower transaction value and pay lower percentage duty on a higher transaction value to increase your portfolio returns

 

If you are a high net worth individual or family that plans to hold the properties for a long period of time, you should dig deeper into the tax implications when purchasing a new property. Additionally, consider how you will manage inheritance of your properties and what the potential tax implications of that is. We recommend contacting a tax consultant or financial planner for more assistance. Or contact us if you need us to connect you.

 

If you are new to investing in real estate, don’t have a large number of properties, and plan to hold your property for the foreseeable future, you’ll most likely want to purchase the property as an individual.

 

And if you got to the end of the article, let us know if this helped!

Subscribe To Our Newsletter

Get updates and learn from the best

More To Explore