In this article, we will be focusing on bankruptcy and Seller’s Stamp Duty (“SSD”) in relation to property gift and trust transactions within a family context.  Recently, the Insolvency, Restructuring and Dissolution Act (“IRDA”) finally came into force after years of work. The IRDA is a consolidation of the bankruptcy and insolvency law, both personal and corporate, in Singapore. This update ensures that the laws in Singapore remain up to date with today’s practice and context.  So how does the new IRDA affect property gift and trust transactions?

Property Gift Transaction

Under bankruptcy laws, gift transaction is deemed as a transaction at an undervalue. A gift transaction may then be subject to a potential “clawback period” of 5 years prior to a grantor (person giving the gift) being made bankrupt by the Courts, under the Bankruptcy Act, which has since been repealed.

Under the IRDA, while the wordings of the relevant sections remains largely the same, one would note that the “clawback period” is now shortened to 3 years. For ease of reference and the purposes of the discussion in this article, the relevant parts of the IRDA are reproduced here:

Transactions at undervalue

361.—(1)  Subject to this section and sections 363 and 365, where an individual is adjudged bankrupt and the individual has at the relevant time (as defined in section 363) entered into a transaction with any person at an undervalue, the Official Assignee may apply to the Court for an order under this section.

 (2)  The Court may, on such an application, make such order as it thinks fit for restoring the position to what it would have been if that individual had not entered into that transaction.

 (3)  For the purposes of this section and sections 363 and 365, an individual enters into a transaction with a person at an undervalue if —

(a)        the individual makes a gift to that person or the individual otherwise enters into a transaction with that person on terms that provide for the individual to receive no consideration;

 Relevant time under sections 361 and 362

363.—(1)  Subject to this section, the time at which an individual enters into a transaction at an undervalue or gives an unfair preference is a relevant time if the transaction is entered into or the preference given —

•  in the case of a transaction at an undervalue —

 (i)         where the bankruptcy application on which the individual is adjudged bankrupt is based on a presumption mentioned in section 312(d), within the period commencing 3 years before the day on which the relevant bankruptcy application is made and ending on the day of the making of the bankruptcy application on which the individual is adjudged bankrupt; or

 (ii)        in any other case, within the period of 3 years ending on the day of the making of the bankruptcy application on which the individual is adjudged bankrupt;

This would mean that a potential buyer of a property has to be mindful if the subject property that he intends to purchase was subject to an earlier gift transaction. And if so, whether the relevant “clawback period” has lapsed. Otherwise, the buyer would risk losing his rights in relation to the property should the Courts to set aside the earlier gift transaction in the event where the grantor (person making the gift) is adjudged bankrupt.

For example:

John and Mary bought a property as joint-tenants on 1 April 2009. On 1 September 2020, he gifted his half share in the property to Mary out of love and affection via a Deed of Gift. Mary now owns 100% of the property. Let’s consider 2 possible scenarios:

• Paul buys the property from Mary on 1 December 2020, and subsequently, John is adjudged bankrupt on 1 January 2021. In this scenario, the Official Assignee may apply to the Courts to set aside the gift transaction on the grounds that it was a “transaction at an undervalue”. Should that happen, Paul would lose his rights over the property. In addition, the banks are generally reluctant to grant loans where the property is affected by gift and this could mean that Paul would have a difficult time securing a loan to his purchase in the first place.
• Paul buys the property from Mary on 1 October 2023, and subsequently, John is adjudged bankrupt on 1 January 2024. In this scenario, Paul would not be affected by John’s bankruptcy as more than 3 years have lapsed since the gift transaction of John to Mary when Paul bought the property.

How do know if a property is affected by a gift transaction? Under a title search, should a property be affected by an earlier gift transaction, one would notice a further remark of “Information on Gift Transaction” with the relevant dates of the gift transfer under the “Particulars of Proprietor and Address” section. This is useful as it enables one to check if the property is affected by a gift transaction before committing to the purchase of it.

Illustration of a Title Search reflecting a gift transaction.

In relation to the SSD, the Donee (the recipient of the gift) has to be aware of the relevant dates when wanting to dispose of/sell the gifted property as it could attract SSD.

Under the Stamp Duties Act, the date of acquisition in a case of the gift transfer shall be the time when the property or part or any beneficial interest therein passes. The present holding period of a property for the purposes of the SSD is as follows:

Using the earlier example of John and Mary, does Mary need to pay Sellers’ Stamp Duty if she sells the property to Paul on 1 December 2020? The answer would be yes. Mary would have to pay 12% SSD on the half share of property that she received from John as it is within the SSD holding period of up to 1 year.

Property Gifted under a Trust

What about a case of a property gifted under a trust?

For example:

John gifted a property to his 19-years-old son, Mark, via a Trust Deed on 1 January 2018. Pursuant to the terms of the Trust Deed, the property was transferred to Mark when he turned 21-years-old on 1 April 2020.

What would then be the relevant date to determine SSD in this case? Under the Stamp Duties Act, the date of acquisition under a declaration of trust would also be the time when the property or part or any beneficial interest therein passes.

Accordingly, the date of acquisition of the property in the example would be 1 January 2018 when Mark became the beneficiary owner. Should Mark sell the property on 1 December 2020, he would then be subject to a 4% SSD (being more than 2 years but less than 3 years since the acquisition of the property).

Having determined that the date of acquisition for SSD calculation is the time when the property or part or any beneficial interest therein passes, one would then argue that the same ought to apply in calculating the “clawback period” under bankruptcy laws.

For example:

John gifted a property to his 2-years-old son, James, via a Trust Deed on 1 January 2018. Pursuant to the terms of the Trust Deed, the property was to be transferred to James when he turned 21-years-old 19 years later. One would then be of the view it is illogical for the “clawback period” under bankruptcy to start counting only 19 years later after the property is transferred to James.

However, from a potential buyer’s perspective, one might want to err on the side of caution and avoid purchasing a property that was recently transferred to a beneficiary under a Trust Deed. This is because some practitioners have taken the view that the “gifting” only happened when the legal ownership was transferred to the beneficiary as the word “gift” was not defined within the IRDA (or the earlier Bankruptcy Act). If one takes this view, then the relevant time in computing the “clawback period” would only start after the beneficiary becomes the legal owner of the property. It remains to be seen how this area of law would be tested in courts and perhaps we would have further clarity thereafter.

Conclusion

When dealing with property gifts and trusts, one ought to exercise caution in dealing with as the impact of the transactions goes beyond years. What we have shared in this article is only a small portion of a huge area of law. As there are multiple variables in a gift and/or a trust transaction, it would be prudent to seek legal advice should you wish to consider setting up one or to even just purchase a property that was subject to such early arrangements.