Don't forget stamp duty - lessons on Stamp Duty Liability in Hong Kong for deceased estates

Inheritance tax has been abolished in Hong Kong since 2005. However, two recent decisions illustrate that tax liability may arise in the form of stamp duty, in certain circumstances, from the assent of the deceased's real property to the deceased's children.

Background

Similar facts arose in So Kam Shing and So Kam Wai v Collector of Stamp Revenue [2018] HKDC 503 ("So") and Wong Suet Foon Shirly v Collector of Stamp Revenue [2019] HKDC 268 ("Wong"), summarised as follows:

• In each case, the parent of the appellant died intestate leaving behind a number of children who were entitled, under the intestacy provisions, to the deceased's property, including real estate (the "Property"). In So, there were three children (KS, KW and the Sister) and in Wong there were five children (SW and four siblings).
• The deceased's children were entitled to the deceased's property in equal shares under the Intestates' Estate Ordinance ("IEO");
• The deceased's children entered into a Deed of Family Arrangement (the "Deed"). The effect of the Deed in So was that the Sister disclaimed her interest in the Property; in Wong three siblings disclaimed their interests in the Property.
• The administrator of the deceased's estate (in both cases one of the children) then executed a Deed of Assent (the "Assent") which vested the property in themselves in their personal capacity and one of their siblings. In both cases therefore, two siblings owned the Property as tenants in common. In So, KS and KW had taken 1/3 more than they were entitled to under the IEO, and in Wong, SW and one sister had taken 60% more than they were entitled to under the IEO;
• The Inland Revenue Department ("IRD") charged ad valorem stamp duty on the excess entitlement under either the Deed or the Assent or both on the basis that they operated as a voluntary disposition inter vivos under the Stamp Duty Ordinance (Cap. 117) (the "Ordinance").
• The IRD's decision was appealed.

The questions for the District Court in both appeals were:

(1)           whether the deeds were chargeable with ad valorem stamp duty; and

(2)           if so, with what amount of stamp duty.

Inter vivos transactions

Section 27(1) of the Ordinance states that stamp duty is payable on any conveyance of immovable property operating as a voluntary disposition inter vivos.

Section 27(4) of the Ordinance defines a voluntary disposition inter vivos as any conveyance or transfer (not being a disposition made in favour of a purchaser or incumbrancer or other person in good faith and for valuable consideration). Consideration will not be deemed to be valuable where by reason of the inadequacy of the sum paid or other circumstances of the conveyance or transfer confers a substantial benefit on the recipient.

In So, Liu J looked to case law to define "a substantial benefit" as, in substance, a gift. (Baker & anor v Inland Revenue Commissioners [1924] AC 270).  Liu J therefore held that an assent is deemed to be a conveyance operating as a voluntary disposition inter vivos insofar as the share in the estate was in excess of the interest that would have been inherited under intestacy laws.

In Wong, Li J confirmed that it was the Assent, rather than the Deed or the Assent and the Deed together, which operated as the assignment and was therefore liable to be charged with stamp duty.

Li J concluded that the Assent, which stated on its face that it was an assignment, conveyed a substantial benefit on SW and her sister in excess of their entitlement. He referred to the judgment in So, and followed Liu J's reasoning.

Calculation of stamp duty

There are two rates at which stamp duty may be charged:

• Scale 1 Rates (the higher rates) of Head 1(1) in the First Schedule of the Stamp Duty (Amendment) (no 2) Ordinance 2014; or
• Scale 2 Rates (the lower rates) which are chargeable on a conveyance on sale if the property is residential and the transferee(s) are closely related to the transferor(s).

In So, the rate at which stamp duty was payable was not disputed, however KS and KW disagreed with IRD's method of calculating stamp duty, as discussed further below.

In Wong, which involved a residential property, the IRD charged stamp duty at the Scale 1 Rates (the higher rates), which SW contested.

Li J concluded that the transferor was SW executing the Assent in her capacity as administratrix and she could not rely on her close relationship with the deceased in her personal capacity. SW could also not rely on her close relationship with her three disclaiming siblings as they had not ever held a beneficial interest in the Property. Therefore, Li J held that the IRD was correct in charging stamp duty at the Scale 1 Rates (the higher rates).

"Distinct matters"

In So, KS and KW disagreed with the IRD's method of calculating stamp duty.

The IRD valued the property at HK$ 16,020,000. Under the IEO, each sibling was entitled to one third each i.e. HK$ 5,340,000. As KS and KW took their sister's share, their excess entitlement was HK$ 5,340,000, which the IRD taxed at 6%, meaning that HK$ 320,400 stamp duty was payable.

KS and KW attempted to rely on section 10(2) of the Ordinance which states that stamp duty relating to "several distinct matters" shall be "separately and distinctly charged". They argued that their sister had transferred her interest in the property in equal shares to each of them and therefore were two distinct matters. They argued that the duty should be calculated as:  (HK$ 5,340,000 / 2 x 3%) + (HK$ 5,340,000 / 2 x 3%) = HK$ 160,200.

Liu J first noted that KS and KW's sister had never had any proprietary interest in the Property. Therefore she did not transfer her 1/3 interest to KS and KW in equal shares, rather the administrator transferred 1/3 of the proprietary interest in the Property to KS and KW by executing the Assent.

Liu J reviewed case law on the meaning of "distinct matters" and held that it meant "different classes of property". In the instant case, the excess entitlement was the same kind of proprietary interest; therefore there was only one matter in the transfer effected by the Deeds. Therefore the IRD's assessment was correct.

Comment

These decisions highlight the importance of effective estate planning to ensure that avoidable tax liabilities are not incurred. If the deceased had executed a will which included similar provisions to the Deed, the inter vivos transactions between the siblings and the resulting stamp duty liability on the appellant's excess entitlement would not have arisen.

The decisions also provide a useful reminder that beneficiaries under intestacy rules do not obtain a beneficial interest in the estate until the execution of the assent.