Buying property using your child’s name – 4 Important factors to consider

Buying property using your child’s name

Table of Contents

Real estate investing being a safe and profitable investment asset holds a common place in the hearts of every working Singaporean.

While we are mutually aligned on the aspiration to own multiple real estates, the journey towards how we work towards owning multiple properties is a very personal journey. Our edge is truly realised when we tap into our unique life circumstances to overcome hurdles posed by issues such as ABSD and loan financing.

We understand that some of you could be in the unique position where you have got a child that is above the age of 21 years old. This could make for a unique circumstance for you to capitalise on to own another property without paying ABSD.

In today’s article, we address the factors to be considered when using your child’s name to purchase the 2nd or 3rd property.

Pretext

We will be writing from the perspective of using your “child” name as a means to own another property. In relation to your unique circumstances, the “child’s” name can be interchanged with using your sibling’s or even your friend’s name.

But note that the risk of things going southing increases as we expand our consideration outwards beyond your child, as both relational ties and your informal locus of control weakens.

Why buy a property under your child’s name ?

For starters, let’s reiterate the benefits of purchasing a property under your child’s name.

One, avoid ABSD. What’s new, many of the strategies conceived in Singapore real estate investing is to avoid paying that ever increasing additional buyer stamp duty.

Based on the latest round of cooling measures, we are looking to save up to 20% on the purchasing price of a property for a Singaporean Citizen and a 30% for Singaporean PR. This can easily come up to a cost saving of $200,000 on a $1.0 million property.

Two, loan tenure. Another benefit that comes with using your child name is the ability to stretch the private bank loan out to its maximum loan tenure of 30 years. This will entail lower monthly repayment amount, making the monthly maintenance of the loan more manageable.

Difference between buying using your child name vs buying under a trust

To avoid confusion. We are focusing on the topic of buying a property using your child’s name, in the case where he is above 21 years of age and has the legal capacity to own a property.
There are significant differences when compared against the option of buying a property under a trust for your child who is below the age of 21.

In the case of purchasing a property using your child’s name, no ABSD is payable. While purchasing a property under a trust would require you to first fork out a 65% ABSD up front base on the date of purchase.

From a financing perspective, the loan quantum and tenure is subject to your child’s income when you are purchasing using your child’s name. Where else, when purchasing under a trust, it will not be eligible for any form of loan financing and the purchase has to be funded with pure cash.

With that out of the way, let’s dive into the factors to considered.

Consideration #1 – Loan eligibility is based on your child’s income

Beyond the advantage of using your child’s age to stretch out the private bank loan to its maximum tenure of 30 years. There is a potential drawback that needs to be addressed.

The maximum loan quantum that is applicable to the property would be limited by your child’s income. Based on the total debt servicing ratio rule (TDSR) established by MAS, the monthly debt obligation that your child undertakes cannot exceed 55% of his monthly income.

To put things into perspective. Let’s consider the example of purchasing a 2 bedder private condominium valued at $1.5 million, using your child’s name with a monthly income of $5,000 per month.

Barring any other monthly debt obligation, the maximum loan your child is eligible for is $576,000. The remaining $924,000 would need to be funded by cash or your child’s cpf.

Hence, depending on your child’s income, the amount of leverage you can take could be limited making the purchase a cash intensive activity.

Consideration #2 – Avoid devising share transfer scheme to overcome financing challenges

In line with the financing challenge shared earlier, there have been some “innovative” solutions being devised, aiming to increase the loan quantum eligibility by bringing in another party into the equation.

This is known as the infamous “99-1” strategy. It works by having your child front the purchase of the property using his name, followed by the selling of 1% share to you prior to securing bank financing.

This helps by expanding the eligible loan quantum by including your income into the TDSR consideration, and minimize the ABSD incurred by restricting it to the 1% share value being transferred to you.

Under normal circumstances, the 20% ABSD would be levied on the full purchase price of property, if your name was included in the purchase right from the start.

Proceed with caution, if this is something you are considering. The long arms of IRAS may eventually catch up to you.

Starting April 2023, IRAS have been looking into past transactions characterised by questionable share transfers, made shortly after property purchase with possible intention to avoid ABSD.

The penalty if convicted for tax avoidance currently stands at payment for the unpaid ABSD, coupled with a 50% surcharge based on the ABSD payable.

Consideration #3 – Your child will be considered a private property owner

One salient point to consider when purchasing a property using your child’s name is that he or she will now be considered a private property owner.

Some years down the road, when your child is looking to settle down and get his or her own property, he will be faced with the problem of having to pay ABSD on his second property.

If matters are not planned properly, it may result in untimely sale of the investment property resulting in sub optimal profit.

To make matters a little more tricky, the cooling measure implemented in 2022 would require your child to fulfil a 30 months wait out period to be eligible for a BTO or EC and a 15 months wait out period to be eligible for a resale HDB.

This could essentially restrict your child’s housing option strictly to the private housing market.

Important to plan ahead

Bearing these constraints in mind, it will be vital to make some forward planning in terms of the holding period for your investment property bought under your child name. Planning the targeted sale date ahead such that it leaves your child sufficient time to clear the stipulated 30 months wait out period.

Given your child is aged 24, at the point of property purchase. It would be prudent to plan ahead for a maximum holding period of 3 to 4 years tops, selling the property when he is 28 years old.

This will ensure that your child has the option to assess all property types when he or she is ready to settle down from age 31 onwards, factoring in the 30 months wait out period.

Having said that, we must acknowledge this is all rough planning on paper, in actual reality many uncertain events could take place.

Consideration #4 – Property ownership lies with your child

When you purchase a property under your child’s name, he or she legally owns the property. You will have no legal claim over the property, your control of the property hinges on the relationship between you and your child.

All will be fine when you and your child sing the same tune, but matters can get complicated when there is a misalignment in priorities or dispute in your relationship.

There are few things that could go wrong, when your child goes rogue. Putting it up front so we can anticipate the worst case scenarios.

Your child can choose to live in the property

Imagine, you and your child had a squabble and he decided it is time to live on his own. It will be a convenient option for him to not renew the lease for the investment property bought under his name, evict the tenant and use it as his own bachelor pad.

At this point you will have to reconcile over the loss of rental income and coax the situation back into its formal profitable state by rationalising with your child.

Your child can choose to pledge the property for a loan

Another possibility that we need to be conscious of is that your child can pledge the property as a collateral to the bank and take up a loan on it. This is often known as reverse mortgage or home equity loan.

If the monthly repayment for the home equity loan is not paid up on time, the bank can seize the property as collateral and foreclose it.

Your child can choose to sell the property

Being the legal owner of the property, your child would have the right to sell the property at his or her own will.

While both of you may be aligned on eventually selling the property for profit, there could be differences in view on when is the best time to sell the property. Hence, it would be important to iron this out beforehand to prevent any misalignment in expectation.

Is it wise to purchase a property under your child’s name ?

Having gone through all the factors of considerations, let’s address the elephant in the room.

We generally felt that “purchasing a property under your child’s name”, as a method to acquire an additional property has its strengths. Given that you have sufficient cash on hand and your child earns a decent income. It is a relatively straightforward means to avoid paying ABSD while acquiring a 2nd property.

The key point of consideration lies in heavy reliance on trust to exert control over the property. Without discounting the strength of you and your child’s relationship, this lack of formal legal ownership over the property can bring about uncertainties and disputes down the road.

So if you are doing this solely for investment purposes, it helps to consider other methods to avoid ABSD as well.

More reads, more gains ?

Kudos on making it this far. The fact that you have invested the last 5 mins reading this article. We believe you are a like minded real estate investor looking to beat the rat race by getting more out of your real estate investment.

If so, do check out the following articles.

Author

  • Jue Wen

    Jue Wen is the content marketing lead. This means he spend his waking hours researching and writing all things real estate. He believes life is a hustle and there is no joy in grinding away daily in our little rat races. He believes making wise moves in real estate investment can be a game changer. Aside from writing all things real estate, you can find him in your nearest bouldering gym.

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Jue Wen

Author

Jue Wen is the property analyst and content marketing lead at decoupling expertise.
He specialises in helping clients overcome the complexities involved in owning their second private property in Singapore.
He had over 10 years of experience in real estate investing and have written over 40 detail guides on decoupling and minimising ABSD. He is a licensed real estate consultant and holds a Bachelor degree in Business Management from the Nanyang Technological University.

Kenji

Co-Author

Kenji is the Group Division Director of ERA Realty Network.
He have got over 20 years of experience in real estate and have successfully helped over 50 couples purchased their second property. He specialises in helping client achieve the best approach towards acquiring their ideal investment properties while minimising ABSD.