People often make gifts to others out of love, affection, appreciation, or for other noble reasons. When it comes to personal chattels, gifting is relatively straightforward and can be as simple as a handover. But what happens when the gift is a real property?
How does one go about gifting a real property?
In Hong Kong, real estate is typically conveyed through an assignment, wherein the assignor transfers the relevant property to the assignee. An assignment is a deed that transfers the legal title of a property to the assignee. According to Section 4(1) of the Conveyancing and Property Ordinance (Cap.219), a legal estate in land can only be created or disposed of by a deed.
A deed of gift is a specific type of assignment through which a property is transferred from a donor to a donee without any consideration. Even if the term ‘Deed of Gift’ is not explicitly used, if the instrument indicates an assignment at nil consideration or significantly below the market value, it effectively constitutes a gift of the property or a portion thereof to the assignee, thus incorporating a gift element.
When are deeds of gift commonly used?
Deeds of gift are typically made out of love and affection, or appreciation and are therefore often made without any monetary reward. For example, people may gift properties to their loved ones as an expression of affection or donate properties to charitable organizations for philanthropic purposes. Deeds of gift may also be required for certain transfers under specific home ownership housing schemes in Hong Kong. However, if the gift is to be made under a will, it falls within the separate context of inheritance.
What considerations are associated with gift transfer?
‘Costs and expenses’
Apart from the legal costs associated with preparing and completing the deed of gift, there are stamp duty implications to consider.
There might be a misconception that no stamp duty is chargeable on a deed of gift since it involves no consideration. However, this is not the case.
Section 27(1) of the Stamp Duty Ordinance (Cap.117) stipulates that ‘Any conveyance of immovable property operating as a voluntary disposition inter vivos shall be chargeable with stamp duty as a conveyance on sale, with the substitution of the value of the property conveyed for the amount or value of the consideration for the sale.’
Generally, if a transfer is made without consideration or significantly below market value, it is treated as a voluntary disposition inter vivos and subject to stamp duty based on the market value of the property, as assessed by the Rating and Valuation Department. There are only limited circumstances where a deed of gift may be exempt from stamp duty. For example, real property donated to tax-exempted charities registered under Section 88 of the Inland Revenue Ordinance (Cap.112) may be exempt from stamp duty (refer to Section 44 of the Stamp Duty Ordinance (Cap.117)). Therefore, it may be necessary to obtain a professional valuation to determine the property’s fair market value at the time of the gift for assessing the potential stamp duty liability.
Unless specifically exempted, a deed of gift may also be subject to the payment of special stamp duty and buyer stamp duty. Applicable rate for ad valorem stamp duty, special stamp duty and buyer stamp duty (as the case may be) can be found in the relevant provisions of the Stamp Duty Ordinance (Cap.117).
If a property subject to a mortgage or other encumbrances is being gifted, it is essential to consider the implications for the mortgage liability or other encumbrances too.
It is worth noting that deeds of gift executed before February 11, 2006, may be subject to estate duty. Prior to the enforcement of the Revenue (Abolition of Estate Duty) Ordinance (2005), properties passed on death were subject to estate duty. According to Section 6(1)(c) of the Estate Duty Ordinance (Cap.111), a property transfer by way of gift within 3 years of the donor’s passing was considered a property passed on death and hence subject to estate duty payment.
Potential Risks and Liabilities for Gift Transfers involving no Monetary Consideration
As a gift transfer involves no monetary consideration, parties involved in the transaction should be aware of potential risks and liabilities as below:
‘Under certain sections of the law’
Section 49 and Section 51 and 51A of the Bankruptcy Ordinance (Cap.6)
Under these provisions, transactions at an undervalue, including gifts, can be set aside by the court upon application by the trustee of bankruptcy if the transaction took place within five years before the presentation of the bankruptcy petition resulting in the debtor being adjudged bankrupt. The court can issue an order to restore the position to what it would have been if the donor had not entered into that transaction.
Section 60 of the Conveyancing and Property Ordinance (Cap.219)
According to this Section, any disposition of property made with intent to defraud creditors is voidable at the instance of any person prejudiced by it.
The leading authority on the Section is the decision of the Court of Final Appeal in Tradepower (Holdings) Ltd (in liq) v Tradepower (HK) Ltd & Ors [2010] 1 HKLRD 674 (CFA). The case involved a disposition of property where no consideration was given to the disponor, and the disponor was insolvent at the time of the transfer. The court concluded that a disposition unsupported by consideration, made by an insolvent disponor or one who rendered themselves insolvent by the transaction, and which subjected the creditors to a significant risk of being unable to recover their debts in full, justifies the inference of an intent to defraud creditors. Such circumstances provided the basis for the court to set aside the transaction under the Section.
‘Under certain circumstances’
Consent and Legal Capacity
The gift may be set aside for want of legal capacity and consent. This means that if the donor is not of sound mind, or under duress and is not able to fully understand the nature and consequences of the gift, the gift is liable to be set aside. This is particularly risky when elderly donors are involved.
Attached Conditions
In some cases, a deed of gift may include attached conditions that the donee must fulfill. These conditions can vary depending on the intention of the donor and the nature of the gift. For example, a donor may gift a property to a donee subject to the donor’s life estate, which allows the donor to continue using and benefiting from the property during his lifetime. The donor may attach condition that the property must be used for a specific purpose. When conditions are attached to a gift, they become legally binding obligations for the donee. Subject to the context of the deed, failure to fulfill these conditions may result in legal consequences, such as the property reverting to the donor or a specified third party. The attached conditions require careful consideration and legal advice as these may affect both the immediate and subsequent parties’ interest of the property.
Considering the aforementioned issues and the potential impact on the property title, parties involved in a deed of gift, such as the immediate parties to the gift, subsequent mortgagees, purchasers or interested parties should exercise caution when making gifts or acquiring titles or securities from a deed of gift. They should conduct thorough due diligence and consider seeking legal advice to mitigate any potential risks or uncertainties when dealing with properties under gift transaction or that have been subject to a deed of gift.
