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Budget 2024/25: Updates on Stamp Duty on Property Transactions in Hong Kong
In the 2024/25 Budget (the “Budget”) delivered by the Financial Secretary of the HKSAR on 28 February 2024, a number of tax measures were proposed. Most notably, all demand-side management measures for residential properties have been cancelled with immediate effect, meaning that no (i) Special Stamp Duty (“SSD”), (ii) Buyer’s Stamp Duty (“BSD”) or (iii) Ad Valorem Stamp Duty (“AVD”) at 7.5% under Part 1 of Scale 1 of Head 1(1A), First Schedule of the Stamp Duty Ordinance (Cap. 117) (“SDO”) needs to be paid for any residential property transactions starting from 28 February 2024.
Property market in 2023
As illustrated in the Budget, insofar as a residential property is concerned, the market sentiment has become very cautious since the middle of 2023 in view of the rising interest rates and uncertainties in the external environment. In 2023, residential flat prices fell by 7% and the number of residential property transactions declined by 5% to a low level of around 43,000.
Cancellation of all “spicy measures”
It is under the backdrop of the property market’s weak performance that all “spicy measures”, including the SSD, BSD and AVD at 7.5% under Part 1 of Scale 1 were cancelled with immediate effect on 28 February 2024.
However, residential property purchasers would still have to pay AVD at the rate under Part I Scale 1 but such rate has been amended to be same as those of AVD under Scale 2 of Head 1(1A), First Schedule of the SDO (i.e., the rate for the sale and purchase of non-residential property on or after 26 November 2020) with effect from 28 February 2024, by way of the Public Revenue Protection (Stamp Duty) Order 2024 as discussed below.
In other words, for residential property transactions, AVD ranging from HK$100 to 4.25% of the stated consideration or the value of the property (whichever is higher) will be levied. The AVD rates immediately before and after 28 February 2024 are set out below:
Rate at Part 1 of Scale 1 from 25 October 2023 to 27 February 2024: Flat rate of 7.5%
Rate at Part 1 of Scale 1 on or after 28 February 2024:
| Amount or value of the consideration or value of the property (whichever is higher) | Rate at Part 1 of Scale 1 | |
| Exceeds | Does not exceed | |
| HK$3,000,000 | HK$100 | |
| HK$3,000,000 | HK$3,528,240 | HK$100 + 10% of excess over HK$3,000,000 |
| HK$3,528,240 | HK$4,500,000 | 1.5% |
| HK$4,500,000 | HK$4,935,480 | HK$67,500 + 10% of excess over HK$4,500,000 |
| HK$4,935,480 | HK$6,000,000 | 2.25% |
| HK$6,000,000 | HK$6,642,860 | HK$135,000 + 10% of excess over HK$6,000,000 |
| HK$6,642,860 | HK$9,000,000 | 3.00% |
| HK$9,000,000 | HK$10,080,000 | HK$270,000 + 10% of excess over HK$9,000,000 |
| HK$10,080,000 | HK$20,000,000 | 3.75% |
| HK$20,000,000 | HK$21,739,120 | HK$750,000 + 10% of excess over HK$20,000,000 |
| HK$21,739,120 | 4.25% | |
Procedurally speaking, the Government will introduce the Stamp Duty (Amendment) Bill 2024 (the “Bill”) to the Legislative Council following the delivery of the Budget. In the meantime, to enable property purchasers to benefit from the said measures as soon as possible, the Chief Executive has exercised his statutory power to make the Public Revenue Protection (Stamp Duty) Order 2024 (the “Order”) under the Public Revenue Protection Ordinance (Cap. 120) to give full force and effect of law to the Bill before its enactment as long as the Order remains in force.
Potential impacts on the property market
All “spicy measures”, which aimed at curbing speculation and stabilizing housing prices, often deterred potential buyers due to the high additional costs involved in property transactions. With the removal of the “spicy measures”, we anticipate that the residential property market will experience a surge in activity. With the potential buyers having higher affordability, it is expected that the demand for residential flats will increase and property prices will potentially be driven up in the short term.
In particular, given that the BSD (which targeted purchasers who are non-Hong Kong permanent residents) is now removed, more foreign and Chinese investors might be attracted to invest in Hong Kong residential properties. Moreover, the abolishment of the SSD (which targeted reselling of residential properties within 24 months of acquisition) is likely to further stimulate the local second-hand property market.
Holding residential properties by corporate vehicles
One point to note is that the removal of “spicy measures” might prompt some potential purchasers (in particular, properties on the expensive end of the spectrum) to purchase residential properties through limited companies which are established for the sole purpose of holding the properties. When it comes to selling the properties, instead of selling the properties directly, property owners can sell the entire shares of the companies which hold the properties, to the purchasers.
The obvious advantage of using this strategy is that the stamp duty for the sale and purchase of shares of a limited company in Hong Kong is currently only 0.2% of the stated consideration or the value of the company (which essentially is the value of the property when the property is the only asset of the company), whichever the higher.
For example, if an individual decides to purchase a residential property valued at HK$7,000,000 after 28 February 2024, the calculations of stamp duty payable under different situations are as follows:
- If the purchaser purchases the residential property directly, the stamp duty payable would be HK$7,000,000 x 3% = HK$210,000
- If the residential property is held by the seller through a limited company whose only asset is the property, and the purchaser acquires the entire shares of the company, the stamp duty payable would be HK$7,000,000 x 0.2% = HK$14,000
Although the savings in stamp duty can be quite considerable by using the abovementioned strategy, it should be noted that:
- Transfer of shares in a limited company involves more complicated procedures as compared to ordinary property transactions. Most notably, lawyers will be more heavily engaged in such equity transactions for procedures such as (i) due diligence to ensure that the company has not, amongst others, incurred any liabilities, and (ii) drafting the share purchase agreement including various representations, warranties and indemnity, to protect the interest of the purchaser. Hence, the associated legal fees would most likely be higher than that incurred in an ordinary property transaction.
- After acquiring the company, the purchaser would have to pay annual maintenance costs to the company secretary and accountant for, among others, filing annual returns, convening annual general meetings, preparing audited accounts and doing tax filings to fulfill the statutory requirements.
- Owing to legal complexity and risks as explained in point (1) above, banks usually do not offer mortgages for property transactions camouflaged by share transfers. Purchasers therefore need to be prepared to pay 100% of the purchase price of the company/property by the time the transaction is completed. A bridging loan might be required in the circumstances.
In view of the high associated costs that may be incurred in a share purchase transaction as discussed above, normally speaking, only residential properties of a relatively high value will justify the use of a limited company to hold the property.
If you have any question regarding the topic discussed above, please contact our partner Victor Ng at victor.ng@oln-law.com or our senior associate Barbara Kwong at barbara.kwong@oln-law.com for further assistance.
Disclaimer: This article is for reference only. Nothing herein shall be construed as Hong Kong legal advice or any legal advice for that matter to any person. Oldham, Li & Nie shall not be held liable for any loss and/or damage incurred by any person acting as a result of the materials contained in this article.
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