(Part 2/3) (cont'd) Abby Choi's estate succession, litigation and administration - and the takeaways

Many queried whether a documented nominee arrangement (i.e. a declaration of trust) between Abby and her ex father-in-law would have assisted in the recovery of the Kadoorie Hill apartment which Abby bought in his name.

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In short, no. ?It is not about whether such a nominee agreement can be proved before Court, but what consequences follow even if it can be so proved: see https://lnkd.in/g765Kksi .?In short, huge stamp duty and penalty will render the recovery exercise futile.?The parties could end up behind bars for conspiracy to defraud the Stamp Duty Office.

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In the continuation of Part 2 of my trio article series, I will explain what may work towards a lower stamp duty in a second residential property investment, and what their limits are.

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Buy a property holding company

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This route is well-known.?Shares are transacted not the property itself.?Transactions of shares in a Hong Kong company attracts 0.26% of its consideration as stamp duty.?This stands as a sharp contrast to that for property transactions.?In Abby’s case, this could achieve a saving of HK$10.7m (US$1.37m, SG$1.82m) in stamp duty.

Another beauty is that the same share stamp duty rate applies across the board.?It is irrelevant whether the purchaser is a HKPR, owns any other residential property, acts on his/her own behalf, or whether the property is sold after 3 years since its last purchase (i.e. the basis for charging Special Stamp Duty).

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However, not all target properties are held by companies.?If a target property is not held by a company, this approach will not work.

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This approach also involves due diligence on the company in addition to the property itself.?The transaction documentation will be more complicated.?Transaction cost (excluding stamp duty) will be much higher than that in a direct purchase.?Typically, it stands at HKD250k at least for each party.?A property is likely in the order of several tens of millions of HKD before this approach can be justified.

While due diligence will be conducted in relation to the affairs of the company, this in any event represents an additional layer of risks which a direct purchase need not address.

Financing is also an issue.?Buying a property holding company usually requires full payment as no completion mortgage is available.?A purchaser may resolve to a bridging loan for payment, but the interest rate is usually much higher than a mortgage.

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Play the bank

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A party can invest into a second residential property as a mortgagee. ?The mortgagee is entitled to the repayment of principal and interest before the purchaser receives the balance, if any, in a sale.?With a 100% LTV ratio, and an appropriately calibrated interest rate, and a mildly appreciating property market, the position of a mortgagee is closely akin to that of an owner.

A mortgage is not chargeable with stamp duty in general, but care should be taken to ensure it does not contain any immediate or automatic right of sale of the property (in other words, such a right is exercisable if and only if there is a default on the part of the mortgagor).?Otherwise, the Stamp Duty Office may consider the mortgage to be a purchase in disguise, and therefore chargeable with stamp duty.

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If the mortgagor/purchaser is a HKPR not owning any other residential property and acting on his/her own behalf in the purchase (which s/he is when financing his/her purchase with a mortgage), s/he will only need to pay the lower stamp duty (i.e. 4.25%).

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The mortgage can designate persons eligible for occupation of the property (e.g. such as the mortgagor and his/her relatives).?It can also refer to a separate facility letter which outlines the tenor of the loan, the interest rate and events of default (e.g. non-payment of outstanding loan on demand).

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So long as the investor mortgagee is not running a money lending business or holding him/herself out as do so (which is highly unlikely in this scenario), no money lending licence is required.

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However, investing in a residential property as a mortgagee is unlikely to obtain any financing.?This requires full payment.

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In a rapidly rising property market (e.g. from 2010 to 2019 in Hong Kong), the difference between investing as an owner and a mortgagee is significant. ?The former enjoys full appreciation of the property, while the latter only enjoys interest on the mortgage. ?Investing in the second residential property as an owner, and paying 15% stamp duty outright for the purchase, may be a simpler solution.

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An ingenious solution is to express the interest rate to be linked with an index reflecting the performance of the property market (e.g. Centa-City Leading Index CCL), but this is marching into an unchartered territory.?The Stamp Duty Office will inevitably look at the substance of the transaction, and it could take the view that this is a purchase disguised as a mortgage. ?If so, all the stamp duties applicable in a purchase will return to haunt the mortgagee investor.

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Recommendation

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Abby’s estate would have been in a better position financially had Abby invested in the Kadoorie Hill apartment as a mortgagee.?Her estate may simply demand the repayment of the outstanding loan, failing which enforce the mortgage, sell the property, and recover such loan from its sale proceeds.?The dilemma faced in a nominee arrangement will not be present: see https://lnkd.in/g765Kksi .

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The issue is whether Abby should have partnered with her ex father-in-law in the purchase.? The answer is a no-brainer from hindsight.? The question is whether, given Abby’s knowledge of his character and other surrounding family circumstances at the time of purchase, she should have shied away from such partnership. This is a question which only Abby can answer.

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In my next article, I will explain the potential maintenance claims faced by Abby’s estate from her ex-husband-in-law’s family, and the possible counter strategies.

Comment and share my article.?Follow me on LinkedIn.?Stay tuned.

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