How to Save a Million Dollars When Buying or Selling Property
While Hong Kong is renowned for its exorbitant property prices, the situation is amplified during the current outbreak of COVID-19 as the global economic downturn takes a toll on the property industry. People are now left looking for novel ways of saving their pennies for a rainy day. If you are currently on the hunt for a new property or want to sell your existing one, we wish to introduce you to the economical method of buying and selling property through company shares.
There are two typical structures in property ownership; the first is direct ownership by an individual and the second is ownership under a holding company in Hong Kong or overseas.
The Difference between a Property Sale and a Company Sale
There are two typical structures in property ownership; the first is direct ownership by an individual and the second is ownership under a holding company in Hong Kong or overseas. In the first case where one buys property directly, the purchase is made through an Assignment Deed and the purchaser is required to pay stamp duty according to a certain scale, the maximum being 15% Ad Valorem Stamp Duty (‘AVD’) and 15% Buyer’s Stamp Duty (‘BSD’). On the other hand, the second case involves a purchase of company share made through a Bought & Sold Note or an Instrument of Transfer whereby the purchaser is only required to pay stamp duty of 0.2% of the value of the shares bought. A special stamp duty would be charged if the newly purchased property is resold within 3 years while there are no resale restrictions for company shares. However, a mortgage is usually available for a purchase of property but not for an acquisition of company shares. The potential liabilities of buying a property are limited to liabilities regarding property ownership such as lawsuits of incorporated owners and contribution to renovation costs. The potential liabilities of holding company shares are not limited to property-related liabilities. Thus, a comprehensive due diligence review and warranties by the vendor are needed.
Obtaining a property through company sale has its pros and cons.
Pros and Cons of a Company Sale
Obtaining a property through company sale has its pros and cons. For instance, a major benefit is paying a lower stamp duty (typically 0.2% of the value) regardless of whether the purchaser is a Hong Kong Permanent Resident, a non-Hong Kong Permanent Resident or a corporate purchaser. There are also no resale restrictions such as special stamp duties and greater flexibility in terms of tax planning. In contrast, a company sale is not as straight-forward as a property sale given that the company may have other assets and liabilities that the purchaser needs to undertake a thorough due diligence review of. It is generally difficult to arrange or obtain a mortgage for a company sale as well. Nonetheless, it is an effective method in saving money due to the comparatively low stamp duty that is ultimately paid on the purchase of the property, a figure which is typically split 50:50 between purchaser and vendor.
Overview of the Company Sale Transaction
- Negotiation: A Provisional Agreement is signed between the purchaser and the vendor and an initial deposit is made by the purchaser.
- Inspection: The Formal Agreement is signed and a further deposit is made. A legal and financial Due Diligence Review as well as an inspection of Property Title is also conducted.
- Pre-Completion: Completion documents are drafted and a mortgage is arranged if possible, though not common.
- Completion: The purchaser and vendor exchange completion documents and the purchaser pays the balance of the purchase price.
- Post-Completion: Accounts are audited and adjustments may be made.
The Importance of a Provisional Agreement
A Provisional Agreement usually includes but is not limited to terms relating to the following areas:
- Parties involved
- The consideration
- The initial and further deposits
- The agreement to enter into a formal agreement at a later stage
- The completion date and time
- Conditions precedent
- Timing (deadlines for fulfillment)
- Completion deliverables
- Completion accounts
- Post-completion audit
- Termination clause
A Provisional Agreement is especially important as it is legally binding, it affects and limits the drafting of the Formal Agreement, and it is the only governing document if the parties cannot agree on a Formal Agreement.
Obtaining a property through the purchase of a company and its shares is an alternative way to save what could be a substantial sum of money.
Obtaining a property through the purchase of a company and its shares is an alternative way to save what could be a substantial sum of money. Though it is less straightforward and can involve more liabilities than a property sale, there are attractive benefits such as lower stamp duty and fewer restrictions on the identity of the purchaser and on the resale of property; purchasers and vendors should carefully consider these benefits when buying or selling a property.
By Jennifer Baccanello and Gladys Wong
DISCLAIMER: The information presented in this article are for informational purposes only and not for the purpose of providing legal advice. We advise that you contact your lawyer to obtain advice in respect to your particular situation.