Hong Kong Residents Heading to the UK – Tax Implications

A Kingsley Napley solicitor discusses some of the tax and other issues that those wishing to obtain a UK visa need to consider.

This year marks the 25th anniversary of Hong Kong’s return to China. The former British colony has seen a number of changes; Beijing controversially imposed a national security law on Hong Kong in 2020 following protests over a change in extradition rules that some say breached the UK’s transfer agreement and China. Hong Kong has also been subject to draconian “zero-Covid” rules, which are starting to ease. For various reasons therefore, many people are considering leaving Hong Kong. It remains to be seen what the importance of this exodus is.

Last year, some 90,000 people left Hong Kong; figures already suggest numbers will be higher this year – 140,000 residents left in the first quarter of 2022 alone. The British National Overseas visa allowing eligible Hong Kong residents to live, work and study here in the UK up to five years has proven attractive. The Daily Telegraph recently reported that the south London town of Sutton has proven a magnet for those arriving and returning. What are the tax considerations for this cohort?

To discuss some of these issues, Laura Harper, partner in the private client team at Kingsley Napley, a London-based law firm. The editors are happy to share these views and invite responses. The usual disclaimers apply to the opinions of external contributors. Email [email protected]

The Hong Kong British National (Overseas) visa was officially introduced on January 31, 2021 and has already attracted over 65,000 applications. The visa is available to those with British (Overseas) citizenship and their eligible dependents, but careful consideration should be given to tax status before or at the same time as making this application.

This is mainly because one of the key factors in determining an individual’s liability to UK tax is their residency status, which is determined by the statutory residency test. This is a complicated test, made up of various sub-tests which are used to determine if and when an individual will be liable to UK income and capital gains tax and, on a later, inheritance tax.

For anyone unfamiliar with the UK tax system, advice should be taken as far in advance as possible so that they can carefully consider how any assets they keep overseas will be taxed. Special tax treatment is available to people who are resident in the UK but not domiciled or deemed to be domiciled here through the use of what is known as the ‘remittance basis’ of taxation for a period up to 15 of the previous 20 tax years.

Individuals taxable on a remittance basis are subject to UK tax on income and capital gains in the same way as domiciled individuals on their UK source income and gains. However, their foreign source income and earnings are only taxed by the UK if and to the extent that they are transferred to the UK, i.e. if they receive, use or benefit from such funds in the UK.

The remittance basis is applied automatically only if an individual’s foreign source income and earnings are less than £2,000 ($2,365). It will therefore be important to ensure that the use of the remittance basis is carefully considered and claimed if overseas income and gains are to remain outside the UK tax net. From the seventh year of use, a fee is charged by HM Revenue & Customs for continued use of the installment base from £30,000.

Recent developments in Hong Kong have also resulted in a massive return of expats who left the UK to pursue lucrative career opportunities in the 1970s and 80s. However, special consideration of the tax situation should be taken by those which were both:

• born in the UK; and
• acquired an original domicile in the UK at birth.

This group is collectively known as “formerly domiciled residents” for tax purposes and for them a special, stricter and faster set of tax rules apply. They are treated as domiciled in the UK for IHT purposes from the start of their second tax year of continuous UK residence, making their worldwide estate subject to UK IHT (with exceptions limited).

There are also income and capital gains tax consequences that apply even more quickly. Former domiciled residents are simply treated as domiciled in the UK for income tax and CGT purposes when they are resident in the UK for the tax year, meaning that the use of the remittance tax base is not available to them. The result is that these people (on the basis that they are UK residents) are taxable on their worldwide income and gains by the UK as they arise, regardless of where they find themselves.

The use of trusts is common in Hong Kong and has long been an established practice among expats residing there. However, the introduction of the Domicile Former Residents Rules has brought about significant changes in the way trusts established by them are treated.

The trust of which they are the settlor are chargeable against all income and gains of the trust as they arise if the settlor is entitled to benefit from this trust. It is not sufficient that the settlor has not actually benefited from it, as taxation by HMRC is not limited by reference to the extent to which the person has benefited from the trust, but simply that he or she does not is not expressly excluded.

In addition, the trust will be subject to the UK property regime which governs the taxation of trusts within the UK tax net. As a result, when a tenth anniversary of the trust occurs or if the trustees make a distribution of the assets of the trust, the trustees are liable to inheritance tax on both UK and overseas assets if the settlor is deemed domiciled for estate tax purposes under the former resident domiciled rules.

Accordingly, any proposed trust distribution should therefore be carefully considered to avoid foreign assets being subject to an estate tax charge. If a distribution is required, it may be useful to make it at a time when the settlor is not a UK resident or still within the one year grace period for inheritance tax under the rules of the old home.

As always, taxes are unlikely to be the deciding factor in a substantial family relocation, but the old adage that “time spent preparing is seldom wasted” can be very true when it comes to discusses the tax implications of moving to the UK.

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