【Preparation for Property Purchase】 Practical Tips for Purchasing a Property at the Lowest Cost

As prescribed by the law, citizens who acquire the second property are required to pay the Ad Valorem Stamp Duty (AVD) that is equivalent to 15% of the transacted property price. As for first-time homebuyers, they can enjoy the old Stamp Duty rates. Given that the property market has been retreating recently, if you aspire to purchase a property with the lowest tax rate and highest mortgage rate, then perhaps you can take heed of the following 5 tips!

1. Becoming a First-time Homebuyer by Changing or Removing the Owner’s Name from the Property Title Deed
Changing or removing the owner’s name from the property title deed are probably some of the most common means used by property buyers to save tax in recently years. If the owner wishes to resume his first-time homebuyer identity through transferring the property to his close relatives, the transferee can only be members of his immediate family, including parents, children and spouse. For example, if the husband of a couple transfers a flat that is worth HK$4 million to his wife, the stamp duty will be HK$90,000, which is almost half of the original stamp duty of HK$180,000. In this case, he can become a first-time homebuyer again at the cost of only HK$90,000.

For removing the owner’s name from the property title deed, it can be executed by transferring one person’s partial ownership of a co-owned property to the other co-owner. For instance, if a couple equally co-own a property valued at HK$6 million, and the husband wishes to transfer his 50%-ownership to his wife, the stamp duty will be HK$45,000, calculated based on 50% of the property price, meaning that he can re-gain the first-time homebuyer identity by simply paying HK$45,000.

2. Co-owners under Joint Tenancy can Apply for Discretionary Tax Deduction
There are two types of co-ownership, namely Tenancy in Common and Joint Tenancy. Under Joint Tenancy, the ownership of each co-owner will overlap with each other, meaning that each co-owner has the right to claim that he owns the property. If any of the owner under Joint Tenancy has passed away, his ownership will be automatically transferred to the remaining co-owners. Although plenty of couples or close relatives tend to acquire a property under Joint Tenancy to avoid disputes over asset inheritance, it is important to note that, as stipulated in the Inland Revenue Ordinance, co-owners under Joint Tenancy shall pay the stamp duty in full according to the prevailing market price of the property. Yet, if the property is transferred between close relatives, the owner could submit an application through his attorney to the Inland Revenue Department (IRD) for discretionary tax deduction.

3. Avoiding Deed of Gift
With a Deed of Gift, one can transfer his property to another person for free, of which the transaction will be remarked as “Deed of Gift” in Land Registry’s record, and a Stamp Duty calculated based on the prevailing market price of the transferred property will incure, albeit without an actual transacted price. It is also vital to note that, according to the “Bankruptcy Ordinance”, if one has gone bankrupt and is found to have gifted a property to another person within 5 years before the date of bankruptcy, it is possible that the Deed of Gift will be voided by the Provisional Trustee. To avoid potential troubles, banks are also likely to reject mortgage applications for properties with a Deed of Gift within 5 years of the mortgage application date.

4. Applying Mortgage at a Bank with Lower Property Valuation and Refinance the Property at Another Bank
Although changing the owner’s name on the property title deed is usually done by simply transferring the property to a close relative, it is regarded as a formal transaction, and thus, both the buyer and seller have to sign a Provisional or Formal Buy and Sale Agreement listing out the names of both parties as well as the transacted date and price, submit a mortgage application to a bank, and engage a law firm to handle related matters. Upon the completion of the transaction procedures, the owner will become a first-time homebuyer again. However, if he wants to save the cost for stamp duty and maximise the mortgage loan when acquiring the next property, he can first apply for a mortgage loan at the bank with the lowest property valuation. For example, if the valuation of Bank A for the involved property is HK$4 million whereas that of Bank B is HK$4.5 million, the buyer can first apply for an 80%-mortgage loan at Bank A, which is equivalent to HK$3.2 million, so that he can pay less Stamp Duty. Upon the expiry of the prepayment penalty period, he can then refinance his property at Bank B which offers a higher property valuation.

5. Lengthening the Transaction Period for the Transfer of Property
Upon changing the owner’s name on the property title deed, the new owner has to apply for a mortgage loan again, which could be hurdled by a lot of factors. For instance, if a mother transfers her property to her daughter who has just graduated from the university and is currently hunting for a job, it is difficult for the daughter to apply for a mortgage as she lacks stable income. Yet, given that the transaction time of a property is not limited to a particular date, the mother can actually state clearly the transaction period when signing the Agreement for Sale and Purchase and pay the stamp duty within the following month. In this case, the mortgage application can be submitted after the daughter has successfully found a job, and during such period, the mother can already resume her status as a first-time homebuyer.

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