There is much enthusiasm in Hong Kong for investment in property, and for good reason. Companies can go bust, thus vaporising the value of their shares and bonds. Property, however, will always have a value. Most Hong Kong real estate will be worth more in 10 years than it is now, although prices may ride a roller-coaster along the way.
There is a shortage of housing here exacerbated by the policy to release land slowly.
The government has announced a special stamp duty designed to curb speculation and cool a heated market. Buyers and sellers are jointly liable to pay a special 15 per cent "tax" on property sold within six months of acquisition, 10 per cent if held between six and 12 months and 5 per cent 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 property 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 – the cause of the rapid rise in prices seems clear enough. Hence the special tax seems unlikely to make much difference.
For those buying property of a higher value – perhaps for investment – it has probably always been the case that it is prudent to buy 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 buy the property.
An individual may only get a tax deduction of up to HK$100,000 for the mortgage interest paid every seven years and only for a loan on their primary residence. The deduction will have little impact on those buying more expensive properties and is not applicable to property bought 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. These are all rather compelling reasons to buy through a company.
Corporate ownership also allows for anonymity. An individual purchaser's name will appear on the public property register but ownership of a company can be confidential.
Possibly the most compelling reason for corporate ownership is that ownership of the property can easily be rearranged by transferring the company's shares.
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 has not enacted any legislation with that effect, so it is possible to "sell" a property by transferring the shares in the property-owning company and thereby avoid the special tax.
The government has always had legislation at its disposal to implement measures similar to the special stamp duty. In March last year, the financial secretary said: "The Inland Revenue Department has established procedures to track property transactions involving speculation. If these transactions were found to constitute a business, we will levy profits tax ..." – in other words, a rapid purchase and sale of a property would be treated as trading in property.
Gains would therefore 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 capital gains tax. If a Hong Kong resident buys UK property and rents it out, then on resale there will be a capital gain. Non-UK residents would not pay tax on this gain. However, if that same investor bought property and then sold it rapidly, he could be considered as making money from trading in property and would therefore have to pay UK income tax on the profit. A Hong Kong company can be used to buy Hong Kong property but it will frequently be 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 free of tax and stamp duty. Transfers in the shares of a Hong Kong company create stamp duty, albeit at low levels, and other costs. Either way there are substantial advantages to corporate ownership. Investors would be wise to consider this option but with this caveat: speak with advisers to keep up to date on legislative and tax changes.
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