Understanding Joint Property Ownership and Tax in Hong Kong

Owning property in Hong Kong, whether for personal residence or investment, frequently involves multiple individuals holding title concurrently. This arrangement, known as joint ownership, necessitates a clear understanding of its legal structures and tax implications. Under Hong Kong’s tax system, co-owners must navigate specific reporting requirements and tax obligations that differ depending on the type of ownership structure.

The Inland Revenue Department (IRD) administers property tax on rental income generated from Hong Kong properties. When properties are jointly owned, understanding how tax liability is assessed, apportioned, and reported becomes essential for compliance and proper tax planning.

Two Forms of Joint Ownership in Hong Kong

In Hong Kong, there are two principal forms of joint ownership: Joint Tenancy and Tenancy-in-Common. While both entail shared property rights, they differ fundamentally in how ownership is held and their implications, particularly regarding succession and tax assessment.

Joint Tenancy

Joint Tenancy is defined by the “four unities”: possession, interest, title, and time. This means:

• Unity of Possession: All owners collectively possess the entire property
• Unity of Interest: All owners hold an equal and identical interest
• Unity of Title: Ownership was acquired through the same legal document
• Unity of Time: All owners acquired their interest at the same moment

The defining characteristic of joint tenancy is the right of survivorship. When one joint tenant dies, their interest in the property automatically passes to the surviving joint tenant(s), who will then own the whole property. For tax purposes, joint tenants are treated as one sole owner.

Tenancy-in-Common

Tenancy-in-Common permits owners to hold distinct, albeit undivided, shares in the property. Key characteristics include:

• Shares can be equal (e.g., 50/50) or unequal (e.g., 60/40, 70/30)
• All tenants-in-common have the right to occupy the entire property
• No right of survivorship – each owner’s share is separate
• Upon death, the deceased’s share becomes part of their estate and passes to heirs according to their will or intestacy laws

This structure offers greater flexibility in the disposition of an individual’s share and allows for unequal ownership proportions based on each party’s contribution or agreement.

Comparison Table: Joint Tenancy vs Tenancy-in-Common

Property Tax Assessment for Co-Owners

How Property Tax is Calculated

Property tax in Hong Kong is charged at a flat rate of 15% on the net assessable value of properties. The calculation follows this formula:

The 20% standard deduction is automatically granted to cover repairs and outgoings. This means property tax is effectively charged at 12% of gross rental income (15% of 80%).

Rental Income Definition

Rental income for property tax purposes includes:

• Rent received or receivable during the year of assessment
• Lease premiums paid by tenants
• Irrecoverable rent that has been recovered

Allowable Deductions

Only limited deductions are permitted under Hong Kong’s property tax regime:

• 20% Standard Allowance: Automatically deducted for repairs and outgoings
• Rates Paid: Government rates agreed to be paid and actually paid by the owner
• Irrecoverable Rent: Rent that was previously assessed but has become irrecoverable

Non-Deductible Expenses:

• Government rent
• Management fees
• Renovation or refurbishment expenses
• Mortgage interest payments
• Building insurance premiums

Tax Liability for Joint Owners

The Inland Revenue Department primarily considers the legal title held by co-owners when assessing property-related taxes. For properties generating rental income:

• Joint Tenancy: Joint tenants are treated as one sole owner for tax assessment purposes
• Tenancy-in-Common: Tax liability is shared among co-owners in proportion to their registered ownership interests (e.g., in a 50/50 split, each owner is liable for 50% of the total property tax)

Under the provisions of the Inland Revenue Ordinance, every joint owner or owner-in-common is responsible for reporting rental income on tax returns and paying property tax as if they were the sole owner. This joint and several liability ensures the IRD can collect the full tax due from any of the co-owners.

Filing Requirements for Co-Owners

Tax Return Forms

Different tax return forms apply depending on the ownership structure:

Important Note: “Other persons” for BIR57 purposes include corporations and bodies of persons, not just individuals.

Who Files the Return?

For jointly-owned or co-owned properties:

• Annual Property Tax Returns (BIR57) are issued to the owners on a property-by-property basis
• The return is typically sent to the precedent owner (the first owner listed on the title deed)
• Any one owner can complete and sign the return on behalf of all co-owners
• Only one return needs to be filed per property, not multiple returns from each co-owner

Filing Deadlines

Property tax returns must be filed according to strict deadlines:

• Standard Deadline: Within 1 month of the date of issue
• Online Filing Extension: Automatic 2-week extension for returns filed electronically if the case meets criteria specified by the Commissioner
• Assessment Year: Runs from April 1 to March 31 (e.g., 2024/25 tax year covers April 1, 2024 to March 31, 2025)

Multiple Properties with Same Co-Owners

If properties are jointly-owned by the same co-owners and the tenancy agreement does not specify the rent of each individual property, owners have two options:

Option 1: Report All Income in One Return

• Report the combined rental income of all such properties in any one relevant Property Tax Return
• Report nil rental income in the other Property Tax Returns
• Clearly state the Property Tax file number where all rental income was reported

Option 2: Apportion by Rateable Value

• Apportion the rental income by reference to the rateable values per demand for rates issued by the Rating and Valuation Department
• Report the apportioned income in each respective Property Tax Return

Authorized Agent Filing

Property owners may authorize an agent to file returns on their behalf:

• Written authorization from the owners is required
• Attach a copy of the Power of Attorney or Letter of Authorization to the return
• The authorization must be signed by the owner and include agent details (name, HKID/business registration number, address, dates of agency)
• Required only for the first time acting as agent

Record Keeping Requirements

The law imposes strict record-keeping obligations on property owners:

• Owners must keep and retain sufficient rental records for 7 years
• Documents must be provided as evidence for deductions and claims when the Assessor requires
• Records should include: tenancy agreements, rental receipts, rate payment receipts, and bank statements showing rental deposits

Special Situations Affecting Joint Ownership

Death of a Joint Owner

The tax treatment changes when a joint owner passes away:

Joint Tenancy:

• The deceased’s interest automatically passes to the surviving joint tenant(s) due to right of survivorship
• The surviving owner becomes the sole owner (if only two joint tenants existed)
• The IRD will open a new Property Tax file in the name of the surviving owner(s)
• Rental income after the date of death should be reported in the surviving owner’s Tax Return – Individuals (BIR60) if they become the sole owner
• Rental income before the date of death is reported in the deceased’s final tax return or the joint return for that period

Tenancy-in-Common:

• The deceased’s share becomes part of their estate
• The share passes to beneficiaries according to the will or intestacy laws
• A new Property Tax file may be opened reflecting the new ownership structure
• The estate or beneficiaries become responsible for the deceased’s proportionate share of tax liability

Personal Assessment Election

Co-owners may benefit from electing Personal Assessment in certain circumstances:

• Personal Assessment allows aggregating income from Salaries Tax, Profits Tax, and Property Tax
• Progressive Salaries Tax rates (2% to 17%) are then applied to total income instead of the flat 15% property tax rate
• This election may reduce overall tax liability, particularly for individuals with:
• Eligible deductions and allowances (married person’s allowance, child allowance, dependent parent allowance, etc.)
• Lower total income that falls within lower progressive tax brackets
• Business losses that can be offset against rental income
• Each co-owner can independently elect Personal Assessment for their share of rental income

Change of Ownership Structure

Converting between joint tenancy and tenancy-in-common has tax implications:

• Conversion is treated as a change in ownership for tax purposes
• The IRD may open a new Property Tax file reflecting the new structure
• Stamp duty may be payable on the transfer depending on the circumstances
• Proper legal documentation is essential to establish the new ownership shares

Penalties and Compliance

Offenses and Penalties

Property owners are subject to penalties if they commit the following offenses:

• Failure to notify the IRD: Not notifying the IRD within 4 months after the year of assessment that rental income has been received
• Late filing: Failing to file the tax return within the specified deadline
• Dishonest information: Failing to provide honest and accurate information to complete the tax return

Penalties can include:

• Fixed penalty of HK$10,000 for late filing
• Additional penalties up to three times the tax undercharged for incorrect returns
• Prosecution for willful tax evasion, which can result in fines and imprisonment

Joint and Several Liability

It is crucial to understand that all co-owners share joint and several liability for property tax:

• The IRD can pursue any one co-owner for the full amount of tax due
• Co-owners should coordinate to ensure timely filing and payment
• Internal arrangements among co-owners regarding tax payment do not affect the IRD’s collection rights
• If one co-owner defaults, others may be required to pay the full tax and then seek recovery from the defaulting party

Practical Considerations for Co-Owners

Communication and Coordination

Effective co-ownership requires clear communication regarding tax matters:

• Designate one co-owner to handle tax filings and maintain records
• Establish a system for sharing rental income and tax payments proportionately
• Keep all co-owners informed of filing deadlines and tax assessments
• Document internal agreements regarding tax responsibility in writing

Documentation Best Practices

Maintaining proper documentation is essential for compliance:

• Keep original copies of all tenancy agreements
• Maintain records of all rental receipts and payments
• Retain evidence of rates paid (demand notices and payment receipts)
• Document any periods of vacancy or rent reduction
• Store all tax returns and assessments received from the IRD
• Keep correspondence with the IRD regarding the property

Tax Planning Strategies

Co-owners should consider various strategies to optimize their tax position:

• Ownership Structure: Choose between joint tenancy and tenancy-in-common based on estate planning needs and tax implications
• Ownership Proportions: For tenancy-in-common, structure ownership shares to reflect actual contributions and desired tax allocation
• Personal Assessment: Evaluate annually whether electing Personal Assessment would reduce overall tax liability
• Timing of Rental Income: Understand that rental income is assessed on a receipts basis, so timing of rent collection can affect tax year liability
• Professional Advice: Consult tax professionals for complex situations involving multiple properties, cross-border ownership, or significant rental portfolios