Designating a home for duty tax exemption
Having looked at how stamp duty can sometimes be avoided last week, this week we discuss the Primary Family Homestead Exemption Certificate application.
Various readers informed me that the PFHC application process has been taking anywhere from 18 months to six years for approval, during which time elderly property owners have passed away before their application was finalised.
This news is very concerning given that in the initial stages of the Amendment’s passage the PFHC approval process was less than a year. Further, these delays have serious adverse consequences to bereaved families by not providing the intended estate tax protection when needed:
• People do not plan to die before receiving the exemption, but life happens;
• Bermuda probate cannot be finalised with unresolved tax liabilities (or exemptions);
• Title to the Bermuda homestead cannot be conveyed to beneficiaries;
• Property cannot be sold without clear ownership (without encumbrances) or to satisfy a deceased’s will bequests and needed distributions for surviving family living expenses.
Thus, the property remains in limbo. How are families coping if a mortgage still needs to be paid, maintenance and repairs are needed, and the property sits idle, possibly deteriorating irreversibly?
Bermudians have always obsessively fixated on property ownership. Given the historic rate of appreciation — we’ll exclude the Great Bermuda Recession Property depreciation of 2008-2015 since no one wants to revisit that time — and the fact that years ago foreign exchange controls in place limited onshore capital market investments (in hard currencies), it is no wonder that real Bermuda property became the investment of choice.
Almost every Bermuda property has, at one time or another, faced a stamp tax on the estate. Generally, families who wanted to protect their homes for future generations, conveyed an interest in the property while the owner was alive, either for life, outright as joint owners, or in a trust or a holding company. These were all estate planning methods with less of a financial stamp tax burden than at death, but for many families, the cost was still emotionally and punitively unaffordable.
Regrettably, then, some families faced their matriarch’s (women generally live longer) last day of reckoning knowing that they could not equitably solve the impending estate stamp tax burden without being forced to sell the family homestead to satisfy the Bermuda Government taxman.
There are also cases of devastating betrayal of family trust and moral responsibility. In numerous documented instances other family members now empowered as wholly or joint owners with the elderly original owners have physically and financially abused their elders.
Realising that this prohibitive tax was negating the social policies espoused — that of helping Bermudians to obtain and keep affordable housing — the Stamp Duties Amendment Act of 2005 was passed, effective April 1, 2005, it exempted the family residence from estate stamp duty.
The Primary Family Homestead Certificate application is an easy, inexpensive ($27 fee) process. All individuals with Bermudian status who own or otherwise have a legal interest in a residential property in Bermuda can deliver to the Tax Commissioner’s Office the fee along with certified copies of the items listed below.
Each individual with a property interest must apply separately with:
• proof of ownership of the property going back at least 20 years. by a copy of the deed, lease, voluntary conveyance, and assessment number;
• the lot plan;
• birth certificate;
• Government-issued photo identification, such as a driver’s licence, voter’s card, or senior card; and
• copy of your Bermuda passport with a status stamp, photo page, and page with name of the holder and date of issue;
• Certificate of Bermudian status, if not indicated on passport. You can find the online application for PFH designation at https://tinyurl.com/y9pk595m.
And now to deal with a few questions from readers. There are many, and space does not permit answering them all so stay tuned for part three next week. Also, feel free to send me your questions.
How does the exemption work during life? All residential property is eligible, including real and leasehold property, nor do you have to currently reside in the designated property. Obviously, if you are lucky enough to own more than one piece of real estate, choose the property with the highest appraised market value.
After death. Your estate representative has nine months to file a deceased person’s application. If more than one property is owned, the property the deceased resided in at passing can only be designated.
If the deceased was resident elsewhere, such as in critical care or nursing home, the property with the least value is designated. You can find the application for PFH designation by estate representative for a deceased owner
Here is what it means for various property owners:
• A single individual. They must have Bermudian status, otherwise, at passing, Bermuda estate stamp duty will be payable on the property’s affidavit of value.
• Couples and their marital exemption, where both owners have Bermudian status. Each must apply independently for their PFHC. The marital exemption from death duty applies if one spouse passes; however, parents with children should still consider the PFHC — in the event that both deaths are simultaneous, or on the second parent to die.
• One non-Bermudian owner, married to a Bermudian. Non-Bermudians cannot apply for PFHC exemption but can receive property under exemption as non-Bermudian spouses do qualify for the spousal exemption.
• What happens if the property owner is Bermudian (status), files and receives the Certificate then dies, but the spouse is not a Bermudian, although has the right to live here and apply for status at some point?
The deceased’s Bermudian spouse’s executors will not have to pay death tax on the value of the property. The inheritance rights of the non-Bermudian spouse would be a question for Immigration — perhaps if a licence to acquire land was obtained then they could acquire that property by inheritance. The non-Bermudian spouse would however get the benefit of a PFHC because they are not Bermudian, but again will qualify for the spousal exemption.
On the death of the non-Bermudian spouse holding the property under licence, death tax would be payable on the value of the property as part of his or her estate. If the non-Bermudian spouse holding under a licence decided to get Bermuda status after the death of the Bermudian spouse, they can apply for a PFHC once they have that status.
• Non-Bermudian parents with Bermudian children. They cannot qualify for the PFHC.
There will be more questions and answers next week.
Readers, please keep in mind. I am not your personal financial planner. My goal is to provide you with answers, references, and thoughtful information that will help you make the best decision possible for your personal situation. This means if you have concerns or situations you cannot manage, you must consult with qualified Bermuda professionals, estate attorneys admitted to the Bermuda Bar, qualified accountants, tax and finance (CA, CPA), insurance advisers (ChFC), or investment managers (CFAs) to receive the appropriate advice that is in your best interests.
I would like to express special thanks to Michael J Mello, QC, JP, TEP, Counsel at Appleby and author of the The Laws of Wills & Estates in Bermuda. He is an estate expert and leading lawyer in Bermuda as well as listed with numerous other accolades from his peers in various legal registers, such as the The International Who’s Who of Private Client Lawyers, 2013 and 2014.
Martha Harris Myron CPA CFP JSM: Masters of Law — international tax and financial services. Pondstraddler Life, financial perspectives for Bermuda islanders with multinational families and international connections on the Great Atlantic Pond. Contact: firstname.lastname@example.org
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