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Voluntary Arrangement among Beneficiaries on the Distribution of Estate might lead to Stamp duty implication according to a recent District Court decision of Wong Suet Foon Shirly v Collector of Stamp Revenue [2019] HKDC 268
11 Apr 2019
It is common ground that inheritance tax or estate duty has long been abolished in Hong Kong. The recent case of Wong Suet Foon Shirly v Collector of Stamp Revenue [2019] HKDC 268, however, sheds light on possible stamp duty liabilities under section 27(1) of the Stamp Duty Ordinance (Cap. 117) arising from the assignment of property from the deceased’s estate by way of an Assent to the children of the deceased.
Background
The Appellant in this case is one of the five surviving children of the deceased who died intestate in 20 February 2012. The five children are beneficiaries having equal shares in the deceased’s estate comprising a property under the Tenants Purchase Scheme (租者置其屋計劃) of the Hong Kong Housing Authority (“HKHA”), which restricts alienation. Having received erroneous advice from the HKHA that only two children can become the succeeding owners of the property, the surviving children mutually agreed that 3 of them would renounce their rights in connection with the property, leaving the Appellant and another sibling as the joint tenants of the property. This agreement was effected by a Deed of Family Arrangement dated 3 May 2014. Subject to this Deed, the Appellant, being also the administrator of the estate, executed an Assent on 16 October 2014, thereby vesting the property onto the Appellant herself and the sibling beneficiary.
The Deed was presented to the Inland Revenue Department (“IRD”) for adjudication of any stamp duty payable. An amount of HKD16,650 was assessed and paid. As for the Assent, IRD initially adjudicated that it was not chargeable with any duty. However, the appellant was later informed by a letter of IRD that both the Deed and the Assent were chargeable with stamp duty as conveyances on sale within the ambit of section 27(1) of the Stamp Duty Ordinance, as they “operate as voluntary disposition(s) inter vivos” to the extent that “the transfer(s) of the Property is in excess of the transferee’s entitlement in the estate in accordance with Intestates’ Estate Ordinance”. Consequently, IRD opined that stamp duty at Scale 1 rates (the higher rates) were payable unless the property concerned was a residential property and that the transferor and the transferee were closely related, in which case the lower rates of Scale 2 rates would apply.
The Appellant’s contentions
Dissatisfied with the assessment, the appellant appealed and contended that:- (1) the erroneous advice by HKHA caused the assignment of the property; (2) the transfer was between two close relatives and thereby Scale 2 rates should apply; (3) the transfer of the property under intestacy should be exempted from any stamp duty; and (4) it would be inappropriate to levy the Scale 1 rates stamp duty for the transfer of a property to the beneficiaries succeeding.
Issues before the court
Noting that after the appeal had commenced, IRD changed its stance by written submission that stamp duty would only be payable on the Assent but not the Deed. The issues before the court were:- whether the disclaiming of the 60% interest or entitlement to the property was a conveyance operating as a voluntary disposition attracting stamp duty; and second, if it was, whether Scale 1 or Scale 2 rates should be chargeable.
Decision of the Judge
The two issues were ruled in IRD’s favour. The judge ruled that the Assent constituted a conveyance operating as a voluntary disposition inter vivos within the meaning of s27(1) of the Stamp Duty Ordinance. First, the wording in clause 1 of the Assent clearly stated that it was to be used as an assignment. Secondly, a conveyance operates to assign all rights and interests including beneficial interests and the Assent gave effect to that in the present case, resulting in the Appellant and the sibling beneficiary acquiring the legal and beneficial interest in the property. Thirdly, the Assent must be a conveyance as it conveyed a substantial benefit on the Appellant and the sibling beneficiary in excess of their entitlement. As to the contention point of the erroneous advice of HKHA, the judge found that it had no bearing on the two issues for the fact that HKHA never restricted the number of assignees for properties under the Tenants Purchase Scheme. In light of the above, the judge came to the conclusion that the Assent was chargeable, and chargeable with the amount of HKD16,650.
Conclusion
Whether the appellant will appeal the Judge’s decision remains to be seen and as such, the court’s decision on the two issues is yet to be definitive. Nevertheless, this case serves as a cautionary tale for the possibility of tax liabilities in probate scenarios. Being mindful of that in estate planning avoids unwanted and unnecessary costs incurred from the transfer of estate properties to your loved ones.
OLN provides a full range of probate and trust and tax advisory services. If you have any questions regarding the above or on any tax issues, please contact one of the members of the tax advisory team.
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