By Fiona Chan

Hong Kong, 8 December 2021: In a landmark judgment, the Court of Appeal has ordered the Inland Revenue Department to repay the stamp duty it charged two sisters who became owners of their late mother’s flat by voluntary arrangement with their three siblings.

The ruling – delivered in the case of Wong Suet Foon Shirly v Collector of Stamp Revenue [2021] HKCA 1090 – is at odds with the IRD’s long-standing practice with regard to the collection of stamp duty from beneficiaries of an estate.

Case background

The appellant’s mother died intestate in 2012. Under the Intestates’ Estates Ordinance (“IEO”), the deceased’s five surviving children were entitled to share her estate, which included a flat in Wong Tai Sin bought under the Tenants Purchase Scheme of the Hong Kong Housing Authority.

The siblings were wrongly informed by the Housing Authority that only two of them could take over ownership. They therefore entered into a Deed of Family Arrangement (“Deed”) in which three of them renounced their rights to the property, leaving the appellant and her sister as joint tenants. The appellant, who was also administrator of the estate, then executed a Deed of Assent (“Assent”) to assign the property to herself and her sister.

The IRD, in the form of the Collector of Stamp Revenue, considered the Deed and Assent to be voluntary dispositions – or gifts – inter vivos (“between living persons”) which exceeded the sisters’ entitlement under the IEO. The Deed and Assent were thus chargeable under section 27(1) of the Stamp Duty Ordinance (“SDO”).

The Collector also decided the higher Scale 1 rate of ad valorem (“according to the value”) stamp duty should apply since the appellant had assigned the property as administrator – rather than in a personal capacity – so could not be considered a close relative, which would have allowed for Scale 2.

Having paid HK$16,650 in stamp duty under protest, the appellant appealed to the District Court. There, the Collector changed his stance and conceded stamp duty was chargeable only on the Assent, not the Deed. The appeal was dismissed, causing the appellant to take the matter to the Court of Appeal.

Court of Appeal judgment

The judges declared that the Deed was a disclaimer, not a conveyance or transfer, so was not subject to stamp duty. They further ruled that the Assent was not chargeable either. Counsel for the Collector had argued the sisters received 100% of the property rather than 40%, which was a deviation from their entitlement under the IEO and thus a disposition inter vivos.

In rejecting this submission, the Court of Appeal gave two reasons. First, the three siblings who renounced their rights had, at best, “only an expectation” they would receive 60% of the property after administration was completed. “The expectation could not be the subject matter of a disposition that would attract ad valorem stamp duty,” said the judges.

Second, the Collector’s position was incompatible with the general law regarding the effect of a disclaimer. “It is well established law that a beneficiary is free to refuse or renounce the gift to him, for the law cannot force a man to take an estate against his will.” Simply put, if someone chooses not to accept an estate, then the estate was never with that person.

In allowing the appeal and ruling the stamp duty should be repaid, the judges also ordered the IRD to pay the costs of the hearing.

Conclusion

Previously, the IRD would charge stamp duty when “beneficiaries of the estate deviate from the will or the law of intestacy and agree among themselves to redistribute their entitlements to the property”. In such cases, the excess distribution over the original entitlement would be subject to ad valorem stamp duty “as deed of gift” at either Scale 1 or Scale 2 rates.

Since the judgment, the IRD has adjusted its policies. Now, transfer of residential property under estate between beneficiaries who are close relatives and/or sale of residential property under estate to a Hong Kong permanent resident and/or close relative are no longer chargeable for ad valorem stamp duty at Scale 1 rates or buyer’s stamp duty if the buyer is a Hong Kong permanent resident.

As a Partner in BC&C, Fiona Chan specialises in dispute resolution and is experienced in a wide range of civil litigation. Her core practice areas include conveyancing and property, Will drafting, estate administration and probate matters, while she is an appointed member of the Panel Solicitors for the Official Administrator. She can be contacted at fionachan@boasecohencollins.com.