No need to stop decoupling and minors buying private homes

IN the July episode of the podcast PropertyBT, I discussed with analysts the lure and pitfalls of investing in homes overseas. In our discussions, I was reminded why some locals invest in overseas homes because of a push factor in the form of Additional Buyer’s Stamp Duty (ABSD). A Singapore citizen buying a second home here pays ABSD of 17 per cent.

If there are ways to get round paying ABSD, many locals may prefer buying homes here instead of overseas. For couples comprising Singapore citizens or permanent residents (PRs), decoupling can help to lower transaction costs when buying another home here.

De-coupling

Take a couple comprising 2 Singapore citizens, who have 50:50 ownership of a S$2 million private home here, which is the only home that either partner owns in Singapore. If the husband transfers his 50 per cent share of the home to the wife, the wife incurs Buyer’s Stamp Duty (BSD) on the 50 per cent share. BSD payable is S$24,600.

Subsequently, the husband can buy a private home here as his first residential property and pay zero ABSD on the said purchase. If the husband buys a S$1.5 million home, the BSD payable is S$44,600.

In the above example, the couple will own 2 private homes under separate names, and incur total stamp duties of S$69,200.

If the said couple did nothing with the shared ownership of their S$2 million home and jointly bought a S$1.5 million home, they would need to pay BSD of S$44,600 and ABSD of S$255,000. In this case, the couple will own 2 homes under joint names, and incur total stamp duties of S$299,600.

The cost saving in stamp duties facilitated by the de-coupling of ownership of the existing home works out to S$230,400.

With decoupling of homeownership, a couple can fairly cost effectively own 1 home for owner occupation and 1 home for investment. With the investment home, the couple can earn recurrent rental income and potentially monetise the asset for capital gains.

In land scarce Singapore, perhaps homes should primarily be used for owner occupation, thus helping anchor locals to Singapore. Should a couple comprising 2 citizens be able to own 2 private homes without incurring ABSD?

Minors owning homes

A family made up of citizens, comprising a couple with 2 children, who are minors, can all live in 1 private home and own a total of 3 additional private homes here for investment, without incurring ABSD. A family comprising a couple with 2 children, all of whom are PRs, can potentially buy 4 homes here under separate names and pay ABSD of 5 per cent on each purchase.

Effective from May 9, 2022, ABSD (Trust) of 35 per cent is imposed on any transfer of a home into a living trust. While ABSD (Trust) is payable upfront, when a home is transferred into any living trust, ABSD (Trust) can be refunded for a trust, which meets certain conditions. The refund amount is the difference between the ABSD (Trust) rate and the ABSD rate of the profile of the beneficial owner with the highest applicable ABSD rate.

Conditions for a refund include all beneficial owners of the home being identifiable individuals, and beneficial ownership of the home being vested in all the beneficial owners at the time of property transfer into the trust. Also, the beneficial ownership cannot be varied or revoked, or be subject to any condition subsequent.

In short, a trust that buys a first private home for a minor, who is a citizen, should be able to get a full refund of the ABSD.

Private home prices here rose 10.6 per cent in 2021 from a year ago, and are up by 4.2 per cent between Q4 2021 and Q2 2022, according to data by the Urban Redevelopment Authority. Recent new private home launches have seen strong sales – AMO Residence in Ang Mo Kio sold nearly all its units by the first day of its launch in July.

Perhaps, policies need to be tightened to dampen demand for homes and prevent home prices from running ahead of economic fundamentals. Should it be made more costly for couples, who are citizens or PRs, to own multiple homes in aggregate? Should the buying of homes by those who are under the age of 21 be prohibited?

Nonetheless, the existing framework – where transaction costs for citizens and PRs buying their first home are much lower than for other groups of buyers such as citizens and PRs buying second or multiple homes, or non-PR foreigners buying any home – seems fair. Perhaps, maintaining the status quo for first-time home buyers of zero ABSD for citizens and 5 per cent ABSD for PRs works well.

With divorce rates that are not immaterial, married couples, who can afford it, may feel more secure owning 2 homes under separate names. Some couples may view gifting a home to a child as part of legacy building and strengthening of family bonds. Also, some couples may see giving a child, who is a minor, a home now instead of monies as part of an estate when the couple passes away as bringing forward the passing of an inheritance.

Property taxes

Property taxes for all non-owner occupiers homes will rise from 10-20 per cent presently, to 11-27 per cent from Jan 1, 2023 and 12-36 per cent from Jan 1, 2024. Higher tax rates apply to more expensive homes.

Going forward, consider levying even higher and more progressive property taxes on non-owner occupier homes to help fund rising government expenditure on healthcare and other needs. Reducing the investment appeal of homes via higher property taxes can also help chip away at demand for homes and keep prices from running away.

Allow a local family to own multiple homes relatively cost effectively, but levy high recurring property taxes on non-owner occupier homes to discourage such a practice and strongly favour owner-occupiers.