Estate planning is a nuanced and intricate process, especially when it involves significant assets such as land and houses. In this article, we will delve into the critical aspects of estate planning for property in Malaysia, including tenancy in common and potential tax implications.
Joint Ownership of Property
Joint ownership is a common method for holding property in Malaysia and it primarily comes in a tenancy in common arrangement. In this arrangement, each owner holds a specified share of the property. These shares can be unequal and are clearly defined in legal documents such as the land title. This form of ownership allows each owner to bequeath their share through a will, ensuring their specific wishes are honoured.
However, this also means that upon an owner's death, their share must go through probate, potentially causing slight delays. Ensuring that your will is clear and legally sound can mitigate these issues and facilitate a smoother transfer.
Illustration
Consider a family property owned by three siblings as equal joint owners. When one sibling passed away, assuming their share was clearly defined in their will will allow for an undisputed transfer to their chosen heir. This clear delineation avoided potential family disputes and ensured a smooth transition.
On the other hand, if the deceased died intestate (without a will) then the portion of his shares on the property will be distributed according to the Distribution Act 1958 and could potentially lead to increasing several new owners on the family property.
Tax Implications
Stamp Duty
Stamp duty is payable on the transfer of property. The amount depends on the property's value and the nature of the transfer. Understanding and planning for these costs is essential to avoid unexpected financial burdens.
Real Property Gains Tax (RPGT)
RPGT is imposed on the gains from disposing of real property. The rates vary depending on the duration the property was held and the disposer's status.
For Malaysian citizens and permanent residents (Part I Schedule 5 RPGT Act):
Within 3 years: 30%
In the 4th year: 20%
In the 5th year: 15%
In the 6th year and thereafter: 0%
For companies incorporated in Malaysia (Part II Schedule 5 RPGT Act):
Within 3 years: 30%
In the 4th year: 20%
In the 5th year: 15%
In the 6th year and thereafter: 10%
For non-citizens and non-permanent residents (Part III Schedule 5 RPGT Act):
Within 5 years: 30%
In the 6th year and thereafter: 10%
Illustration
Imagine you inherited a property from a relative. If you decide to sell this property within five years of acquisition, the RPGT rates will apply as follows. Assume you are a Malaysian citizen:
1. Property sold within 2 years: If you inherited a property valued at RM500,000 and sold it for RM700,000 within two years, the gain of RM200,000 will be taxed at 30%, resulting in an RPGT of RM60,000.
2. Property sold in the 4th year: If the same property is sold in the fourth year for RM700,000, the gain will be taxed at 20%, resulting in an RPGT of RM40,000.
3. Property sold in the 6th year: If the property is sold in the sixth year or later, there will be no RPGT as the rate drops to 0%.
These examples highlight the importance of strategic planning when deciding the timing of property disposal to minimise tax liabilities. Understanding these details and incorporating them into your estate planning ensures smoother financial transitions and compliance with Malaysian tax laws.
Conclusion
Effective estate planning for property in Malaysia requires a thorough understanding of tenancy in common, the strategic use of wills and trusts, and awareness of potential tax implications. By addressing these elements and avoiding common pitfalls, you can ensure a smooth transfer of your property and provide peace of mind for your loved ones.
If you have any questions regarding the above, please contact our Managing Partner, Eugene Yeong.
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