What is Decoupling and 99-1 Split? And, Why?

In the high-stakes realm of Singapore’s property market, decoupling has emerged as a strategic maneuver for those looking to “siam” the financial blow of Additional Buyers Stamp Duty (ABSD). With ABSD rates now peaking at 20 percent, the attractiveness of owning a second property without the huge tax has never been stronger. However, decoupling is not without its complexities and potential pitfalls, particularly the infamous 99-1 split.

Understanding Decoupling

Decoupling, in the context of property ownership, involves one party transferring their share of a property to another party, thereby reducing their property count to zero. This strategic move is primarily motivated by the desire to avoid ABSD, which only applies from the second property onward for Singapore citizens.

For instance, consider a married couple who jointly own a property. If the wife transfers her entire share to her husband, she effectively owns zero properties. Consequently, when she purchases another residential unit, she is exempt from paying ABSD. However, this seemingly straightforward process have costs and legal considerations that you have to be careful about.

The HDB Exception

Before going deeper into the mechanics of decoupling, it’s crucial to note that the practice is largely restricted to private properties. The Housing & Development Board (HDB) prohibits decoupling except under special circumstances, such as divorce. This policy shift, implemented on May 4, 2016, closed a loophole that previously allowed decoupling for HDB flats. Nonetheless, those with good reasons for decoupling can still appeal to HDB, preferably with the assistance of a real estate agent.

The 99-1 Split: A Closer Look

One of the most frequently discussed aspects of decoupling is the 99-1 split. When purchasing a property, buyers can choose between two methods of holding: joint tenancy and tenancy-in-common. Joint tenancy treats the co-owners as a single entity, while tenancy-in-common allows for a division of the property into specific shares.

For those aiming to decouple, tenancy-in-common is the preferred method, typically with a 99-1 split. This arrangement means one party owns 99 percent of the property, while the other owns just 1 percent. The rationale behind this split lies in the application of Buyer’s Stamp Duty (BSD). Transferring a larger percentage of a property will get a higher BSD. By opting for a 99-1 split, the BSD applies to a minimal share, so it will significantly reduce the cost.

Consider a property valued at $1 million. In a 50-50 split, transferring 50 percent incurs a BSD of $9,600. Conversely, a 99-1 split results in a BSD of just $100 for the 1 percent transfer. This stark difference highlights why the 99-1 split is a popular choice among those seeking to decouple.

CPF Considerations

Another critical aspect of decoupling involves the Central Provident Fund (CPF). For decoupling transactions, the buyer must return all their CPF used for the property purchase, including accrued interest. This requirement stands regardless of the cash proceeds from the sale. This differs from a typical resale scenario where a negative sale does not really need the return of CPF to the seller.

The Legality of Decoupling

It’s essential to differentiate between decoupling and the so-called “99-1 loophole” that the Inland Revenue Authority of Singapore (IRAS) targeted in April 2023. The loophole involved transferring a small percentage of a property to someone who already owns a property, thereby “siam-ing” ABSD. Unlike this loophole, decoupling is a legitimate practice, provided it adheres to the stipulated regulations.

Financial Implications

Despite its advantages, decoupling is not a one-size-fits-all solution. One of the primary considerations is the need for two separate mortgages. This scenario is typically feasible for higher-income Singaporeans, given the current property prices and interest rates. For instance, a couple might sell their jointly-owned property to buy a larger one, sharing the mortgage repayments. However, in a decoupling situation, each party must bear the full weight of an individual home loan. Any loss of income by either party could trigger the urgent sale of one of the properties.

The Impact of Rising Interest Rates

Decoupling was a more sound strategy during periods of lower interest rates. From 2009 to the pre-Covid era, home loan rates could be as low as under two percent, making separate mortgages more manageable. However, with rates approaching four percent as of 2022, the financial burden has increased significantly. Moreover, the Total Debt Servicing Ratio (TDSR) framework now caps monthly home loan repayments at 55 percent of monthly income, further complicating the financial landscape for potential decouplers.

Trust and Legal Considerations

Decoupling also introduces trust and legal complexities. In a tenancy-in-common, either party can sell their share to a third party, potentially resulting in co-ownership with an unwelcome stranger. Additionally, upon the death of one party, their share may not automatically pass to the surviving spouse, potentially leading to ownership disputes.

Weighing the Benefits and Risks

Given these considerations, decoupling is not a decision to be taken lightly. It’s advisable for individuals to consult with legal and financial professionals to thoroughly understand the implications. For those in the upper-income brackets or with fully paid-off properties, decoupling can offer significant tax advantages and the opportunity to expand their property portfolio. However, for the average Singaporean, the financial and legal risks may outweigh the benefits.

Case Study

To illustrate the practical application of decoupling, consider a couple, John and Mary. They own a private condominium worth $1.5 million, with a mortgage balance of $500,000. They decide to decouple, with John transferring his 50 percent share to Mary. This transaction incurs a BSD of $14,600. After the transfer, John owns zero properties, allowing him to purchase a new property without incurring ABSD.

However, this move also requires Mary to refinance the existing mortgage under her sole name. Given the current interest rates and TDSR requirements, Mary must have sufficient income to service the loan. Additionally, John must return all his CPF used for the initial purchase, totalling $200,000 with accrued interest. This scenario underscores the financial planning and coordination needed to execute a decoupling strategy successfully.

The Future of Decoupling

As Singapore’s property market evolves, so too will the strategies employed by buyers and investors. Decoupling remains a viable option for those with the financial means and risk tolerance to navigate its complexities. However, the rising interest rates and stringent loan curbs necessitate a cautious approach.

Conclusion

Decoupling offers a pathway to “siam” ABSD and expand property ownership, but it will always have financial, legal, and trust-related challenges. Prospective decouplers must carefully weigh the benefits against the potential risks and consult with professionals to ensure they make informed decisions. In a market with high property prices and evolving regulations, decoupling is a tool best reserved for those who can afford its costs and complexities.

By understanding the nuances of decoupling and the 99-1 split, property owners can better navigate Singapore’s dynamic real estate landscape. Whether you are considering decoupling as a strategy or exploring other avenues to optimise your property investments, staying informed and seeking expert advice is paramount.

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