There is much enthusiasm in Hong Kong for investment in property. Companies can go bust and their shares and bonds become worthless. Property will always have a value and it’s safe to say that any piece of Hong Kong property will be worth more in 10 years than it is now although it may be a roller coaster ride. . There is a shortage of housing here exacerbated by the government’s policy to release land slowly to maximize the price. The government announced a special stamp duty designed to curb property speculation and cool an overheating market. By way of reminder buyers and sellers are jointly liable to pay a special 15% tax on property sold within 6 months of acquisition, 10% if held between 6 and 12 months and 5% if sold within 24 months of purchase. Why not release some more land instead? Ultimately the market will only calm down if there is sufficient supply to meet demand. A properly analyst friend recently estimated that annual demand for new properties was 40,000 units and only about 15,000 units come on to the market each year so the cause of the rapid rise in prices seems clear enough.
The special ‘tax” is unlikely to make much difference. For those purchasing properties of a higher value or for investment it has probably always been the case that it is prudent to purchase in the name of a company and pay corporation tax on rental income rather than personal tax. This is due to the differing treatment of interest payable on loans taken out to purchase the property. An individual may only get a tax deduction of up to HK$100,000 in mortgage interest every 7 years and only for a loan on their primary residence. The deduction will have little impact on those purchasing more expensive properties and has no application to anybody purchasing property for investment. If a company makes the purchase it pays profits tax not property tax and all expenses in relation to the property are deductible from income. This is a rather compelling reason to purchase through a company.
Corporate ownership allows for anonymity. An individual purchaser’s name will appear on the public property register but it is relatively easy to disguise the true ownership of a company. Ownership of a company can easily be rearranged by transferring the shares and allows the special tax to be avoided because there is no transfer of title in the property. In some countries a transfer of the shares in a property owning company is treated and taxed as though it was a transfer in the property itself. This is not the case in Hong Kong. The government have not enacted any legislation with that effect so the special tax is relatively easy to avoid. In fact the government has always had legislation at its disposal which could have a similar effect to the special stamp duty. As long ago as 2008 the Financial Secretary indicated that a rapid purchase and sale of a property would be treated as trading in property and gains would be taxed as income not capital gains. The former is taxed the latter is not. Be aware of this possibility. This measure is similar to the position for foreign investors in UK property. Non residents of the UK are not subject to UK CGT. if an Hong Kong resident purchases UK property and exploits it by renting it out then on resale there will be a capital gain produced which is not taxable in the UK. However, if that same investor buys property and then sells it rapidly he can be considered as producing income from trading in property and would therefore have to pay UK income tax on the profit.
Frequently those going to live in a higher tax country are faced with estate duties and global taxes on income and capital gains. Often a solution to that problem is to transfer assets into a trust or foundation prior to arrival in the new country. Being able to achieve that by a transfer in shares of a company is much cheaper and easier than trying to rearrange title to the property.
A Hong Kong company can be used to purchase Hong Kong property but it will be frequently more advantageous to use an offshore company and register it in Hong Kong if necessary. Transfers in the shares of an offshore company can be made completely free of tax and stamp duty. Transfers in the shares of a Hong Kong company attract stamp duty, albeit at low levels, and some other costs and expenses.
Either way there are substantial advantages to corporate ownership so investors would be wise to consider this option but legislation and tax systems change rapidly and without notice so it would also be wise to check with your advisors before proceeding.
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