Property

All about Stamp Duties



Stamp duties are a fact of property life in Hong Kong and they’re among the most confounding part of a purchase. With a change announced in early November, Squarefoot tries to untangle the knots.

Stamp duties, in essence, are taxes. Duty free shopping is, after all, the chance to pick up expensive perfumes, liquor or electronics without the added import duty (tax) on them.

Stamp duties, which in Hong Kong officially register your property purchase or tenancy agreement with the government (and are a source of public revenue), are usually payable within 30 days.

That’s the easy part. The more complicated part comes when trying to calculate exactly how much stamp duty will add to your home purchase. There haven’t been any changes to the law since early 2013, so now seems as safe a time as any to break down precisely what stamp duty amounts to.

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Taxes Old and New
There was a time when purchasing a flat in Hong Kong meant figuring out your budget, subtracting (maybe) 10% for renovations, 1% for your agent’s commission, legal fees and, maybe, 2% or 3% for the stamp duty. Those calculations are much more complicated now.

The first thing to get a handle on is what the stamp duties are and how they are rated. Hong Kong currently has three different stamp duties: the Special Stamp Duty (SSD) introduced on November 20, 2010 and revised October 27, 2012; the Buyer’s Stamp Duty (BSD) implemented on October 27, 2012; and the Double Stamp Duty (DSD, also called the ad valorem stamp duty) introduced on February 23, 2013.

The SSD was designed to disincentivise speculation in the residential market, and is levied on property purchases by individuals or companies that are then sold within three years of the purchase date. Anyone selling a property fewer than six months after buying it pays a 20% duty on the sales price. The rate drops to 15% for properties held between six months and one year, and down to 10% for property held 12 to 36 months. Those rates represent a 5% increase at all levels from 2010.

The BSD is levied on all purchases by anyone (or company) other than a permanent resident of the SAR. The rate is 15% of the purchase price and is charged in addition to the DSD.

The trickiest of the three is the DSD, which everyone pays at some level. Permanent residents who do not own another property pay as little as $100 (for properties priced up to $2 million) and as much as 4.25% on property over $21 million ($21,739,120 to be exact). The previous DSD for non-permanent residents was 8.5% until November 5, when it became a flat 15% on all second home purchases and any purchases by non-residents and companies.

The grand total for a $24 million second flat at Island Crest in Sai Ying Pun by a resident, in reality, is $31,200,000 — 30% (including BSD and DSD) above the purchase price, and that’s before renovations, and solicitor and agency fees. For a permanent resident, the price drops to $25,020,000. That is, of course, assuming the property is held for three years.



No End in Sight
That’s a lot of stamp duties and exemptions to work around, and with an extra 25% in taxes added onto the list price it’s easy to see why sales transactions in Hong Kong have slowed drastically.

As David Ji, Knight Frank’s director and head of research and consultancy for Greater China, notes, the government has done its job in cooling the market.

“Residential transaction volumes have been dragged down significantly. Prices decreased too, but they started to rebound a few months ago on the back of sales promotions by developers.”

Many of those promotions came in the form of 80% (or higher) LTV financing or rebates and discounts that offset stamp duties. Even in the mass market and for permanent residents the duties can add up. For investors it’s worse.

“For a $7 million flat, the buyer is subject to a 7.5% DSD and a 15% BSD, with an assumption of the owner paying the SSD if applicable. The buyer has to pay a total stamp duty of $1.575 million,” says Colliers International’s director of research and advisory, Daniel Shih.

The added stamp duties were clearly cooling measures, often referred to them as just that in the media. Until November 4, there had been no new moves from the government or the Monetary Authority in over three years, but capital inflows from China prompted action.

“The new measure to standardise at 15% will affect the demand for second properties, in particular for investment purposes,” says Cliff Tse, regional director of valuation advisory services at JLL. Eliminating the previous DSD will cool down investor demand for small lump-sum properties.

“Previously, investors did not mind paying the double stamp on [properties] below $4 million. Now the flat rate at 15% will deter these investors as well.” The question of whether or not any of the stamp duties will be rolled back is now moot.

Colliers’ Shih predicts all the stamp duties will, “Stay put, considering the overall rate of price decline has tapered off to 6% since their September 2015 peak. This compares with a decline of 11% between September 2015 and March 2016.”

The common wisdom indicates that prices will have to correct a further 10% to 15% before the government would consider any radical changes.

Knight Frank’s Ji agrees. “The government has been emphasising the continual implementation of the stamp duties, even when prices were on their downtrend earlier,” he theorises.

“The stamp duties will not be relaxed or removed until prices have come down significantly. House prices are still unaffordable for many people, [and will stay that way] until more new supply comes online in the coming years.”