When contemplating estate planning, real property normally features as the most valuable asset held within an individual’s estate. Prior to April 1, 2005, the owner of a property (“Grantor”) would incur stamp duty upon the disposal of that property, whether through a transfer during his lifetime or a transfer to the beneficiaries of his estate following his death.

The stamp duty rates that apply in respect of a voluntary conveyance (or gift) of property to another party during a Grantor’s lifetime are:

[bul] on the first $100,000.00 of value-2.5 percent

[bul] on the next $400,000.00 of value-3 percent

[bul] on the next $500,000.00 of value-4 percent

[bul] on the next $500,000.00 of value-5 percent

[bul] on any value over $1,500,000.00-6 percent

So, a transfer of $500,000 in value attracts $14,500 in stamp duty.

The rates that apply in respect of a transfer or devise following death are:

[bul] on the first $50,000.00-nil

[bul] on the next $150,000.00-5 percent

[bul] on the next $800,000.00-10 percent

[bul] thereafter-15 percent.

So, a transfer of $500,000 in value following a property owner’s death attracts $37,500 in stamp duty (being $23,000 more than the voluntary conveyance rate).

Given the disparity between the two rates, a Grantor had a very strong incentive to voluntarily convey his property or an interest in it to his children in order to minimise the stamp duty impact. This step was, however, (and continues to be) accompanied by a surrender of full control over the Grantor’s property, which sometimes had dire consequences, especially in instances where the relationship between a Grantor and his children deteriorated after a voluntary conveyance had been completed.

A property owner was therefore forced to choose between retaining full ownership and control of his property during his lifetime, thus burdening his children with potentially substantial stamp duty (or death duty) costs following his death, or opting to voluntarily convey his property during his lifetime, thus minimising stamp duty but risking difficulties through losing control of his property.

With the introduction of the Stamp Duties Amendment Act 2005 (“the Act”), however, Government offered Bermudians a significant estate planning concession through the Primary Family Homestead Designation (“Designation”).

The Designation allows a property owner to register one property as his primary family homestead so that, following his death, the designated property can pass to the beneficiaries of his estate without attracting any stamp duty.

This extinguished the need for a voluntary conveyance in respect of the designated property during the Grantor’s lifetime in order to minimise stamp duty. Securing the Designation involves registering a property at the Tax Commissioner’s Office.

The property owner completes an ‘Application for Primary Family Homestead Designation’ form and submits the form together with a certified copy of the conveyance that passed the property to him.

If an application is not submitted by the property owner prior to his death, his estate representative may make an application to designate his property when his estate is being settled.

The property owner will also be required to indicate the capacity in which he holds his property (or his interest in it). If he holds title to his property with other parties, separate Designations can be procured in respect of each interest. This involves filing separate application forms and lodging those with the Tax Commissioner’s Office.

Once a property has received a Designation, the beneficiaries of the property owner’s estate will benefit from the primary family homestead stamp duty exemption. However, there are a number of points to consider regarding the Designation process.

Firstly, the property owner may only register one property. For Bermudians who own two or more properties, it is generally advisable to designate the most valuable property as their primary family homestead. Stamp duty is assessed against property based upon that property’s market value at the time of the property owner’s death, and thus any additional property held by the Grantor which cannot benefit from the exemption will be taxed accordingly.

Secondly, only developed residential property may be considered for Designation. As such, commercial property does not qualify, and vacant land is also excluded.

Under the Act, residential property may be defined as a single dwelling house or a condominium unit. Alternatively, it may take the form of a single lot of land holding several apartments or more than one residential building.

Thirdly, only an individual possessing Bermudian status may receive a Designation in respect of his property. The ability to procure a Designation does not extend to trustees of a trust, regardless of whether the beneficiaries under that trust possess Bermudian status.

Finally, once a property owner has procured a Designation in respect of a particular property, the Designation can be altered to include a different property.

The ability to apply for a Designation now serves as an important tool in estate planning, as it eliminates a heavy tax burden for the property owner’s family members or other designated next of kin upon his death.

Attorney Stephen Males is a member of the Property Practice Group of Appleby Hunter Bailhache. Copies of Mr. Males’ columns can be obtained on the Appleby Hunter Bailhache website at www.applebyglobal.com.

This column should not be used as a substitute for professional legal advice. Before proceeding with any matters discussed here, persons are advised to consult with a lawyer.