While it is common practice for HDB owners to switch out their HDB flats for a larger flat or a private property to raise their families in, some buyers actually acquire HDB flats with the intention of living out the rest of their lives in it or passing it down to their children, whichever comes first. But it doesn’t always go smoothly. Some HDB owners still make costly mistakes that doom their future generations, so beware and make sure you don’t make the same ones.
1. Old is not gold
While your circumstances may allow you the option of getting an older resale flat, especially one with a decaying lease (less than 50 to 60 years), you may want to consider the long-term effects it may have on your finances and future plans.
For example, the lease may expire during your retirement years, leaving you with the unfavourable situation of looking for a new place when you should be enjoying your time with your family. Your older children may also have emotional attachments with the property and find it difficult to sell because of that and/or have a tough time finding buyers — they typically prefer units with a longer remaining lease. So even if you and/or your children manage to find a buyer, the selling price would take a hit as the decaying lease would become a negotiating factor.
However, if you have no intention of passing the flat to your children, a great way to unlock the asset value of the flat while living out the rest of your life in it would be to apply for the HDB Lease Buyback Scheme (LBS). You can do this if you are above 65 years old, have lived in the flat for at least 5 years, and the flat has at least 20 years of remaining lease.
2. In property we trust
While HDB flats are great “starter homes” for most households, some homeowners want to have an investment property that they can rent out and earn passive income from. But owning 2 properties means you’ll have to pay Additional Buyer’s Stamp Duty (ABSD), which is a sum to be reckoned with. So to avoid paying it, some parents try to buy a 2nd property — but in their child’s name — and hold it in a Trust. As the child’s “first property”, it will be exempt from ABSD.
BUT the Inland Revenue Authority of Singapore (IRAS) is stringent on these Trusts and has laid down strict conditions:
- The Trust should be created with only the child/ children as Beneficiaries.
- The property should be bought fully in cash, with no mortgage or any financing. The parent cannot loan the money to the child’s Trust, which has to be paid back.
- It must be an irrevocable gift. As such parents may not take the property back from the child at any point.
- All benefits from the property, including rental income, must be allocated to the child in a designated account, which cannot be used by the parent.
- Proceeds from the sale of said property must be held for the child in a designated account and cannot be appropriated by the parent.
- The parents can stay in this property only if the child is living with them in it.
- The parent can decide at what age the Trust will distribute the property to the child, the child does have a right to acquire this property from the Trust at the age of majority of 21 years old.*
*If the child is not eligible to take over the flat at the age of 21, the flat may have to be returned to HDB.
If one or some of the above conditions are unfulfilled, the Trust will also be reviewed and the property may be considered to have been bought by the parents for their own interest. The parents will then have to pay the applicable ABSD as well as a penalty.
As one can easily foresee, this may make it difficult for adult children to acquire their own HDB or property without first having to dispose of the property bought under their name, or having to fork out ABSD for their own home.
3. Benefit or burden?
While it may seem like a godsend to inherit a HDB flat for those of you longing for a home to call your own, it may not be such a convenient situation to be in if the beneficiary of a Will already has an existing property.
As per regulations, a person may only own one HDB flat at a time. If the beneficiary already has an existing HDB flat, they will have to sell their interest in one of the two HDB flats. This is applicable even if you only have partial ownership of the existing unit.
If the beneficiary has an existing private property and the inherited HDB flat was bought before 30 August 2010, the beneficiary may keep both, with the below conditions:
- The beneficiary must be eligible to own an HDB flat;
- The beneficiary and their family must live in the HDB flat.
If the inherited HDB was bought after 30 August 2010, the beneficiary may only keep one of the properties. Should they decide to keep the HDB flat, they must live in it and sell the private property within six months. If they decide to keep the private property, they must sell the HDB flat within six months if it has reached MOP. Should the MOP not be met, HDB will step in to assist with the case.
As you can see, inheriting a HDB flat comes with its own set of potential headaches. Even if your beneficiaries do not have an existing property, decaying leases make it a much less favourable option, especially for adult children who may much rather prefer getting a BTO with a brand-new lease.
Now that you’re aware of the 3 costly mistakes that HDB owners make, we hope you’re more equipped to not fall into any of the mentioned situations.
But as always, you can come to us for assistance. Contact us via our Live Chat, Whatsapp, or fill up this form, and book a free consultation with our knowledgeable and experienced in-house agents who can advise you on your next steps.