Hong Kong Migration and UK Tax

It has been 25 years since Hong Kong was returned to Chinese control, and this year marks the milestone. Beijing enforced a national security ordinance on Hong Kong in 2020 after demonstrations over a change to extradition laws, which some felt violated the UK/China handover agreement. Hong Kong has been subject to stringent “zero-Covid” laws, which are beginning to loosen. As a result, people are contemplating leaving Hong Kong for different reasons. It is unclear how large that migration will be.

Last year, 90,000 individuals fled Hong Kong; 140,000 left in the first quarter of 2022. The British National Overseas visa allows Hong Kong citizens to live, work, and study in the UK for five years. According to a recent article published by the Daily Telegraph, the town of Sutton, located in South London, has become a magnet for people moving to and returning to the area. What are this group’s tax implications?

More than 65,000 people have applied for the Hong Kong British National (Overseas) visa since it was launched on 31 January 2021. The visa is open to British Nationals (Overseas) and their qualified dependents, although the tax situation must be considered before or at the time of application.

The Statutory Residence Test establishes an individual’s UK tax status. This challenging test is used to assess whether and when an individual is subject to income and capital gains tax in the UK and, subsequently, inheritance tax.

Anyone unfamiliar with the UK tax system should get advice as early as possible to understand how foreign assets will be taxed. People who live in the UK but are not from here or are not considered to be from here can get special tax treatment if they use the “remittance basis” of taxation for up to 15 of the last 20 tax years.

People who are taxed on the remittance basis pay the same UK income tax and capital gains tax as people who live in the UK on their income and gains from the UK. However, HMRC only taxes their gains and income from overseas sources if and to the amount that these funds are transferred to the UK, meaning if they receive, use, or benefit from such money in the UK.

The remittance basis is applied automatically only if a person’s foreign source income and gains are below £2,000 ($2,365); thus, it’s crucial to claim it if offshore income and gains are to be kept out of the UK tax system. In addition, HM Revenue & Customs charges a £30,000 fee for remittance basis usage after the seventh year.

Recent changes in Hong Kong have also resulted in a significant return of British expatriates who departed in the 1970s and 1980s to seek lucrative professional possibilities elsewhere. Therefore, special consideration of tax situation is needed for persons who were either   Born in the UK or with a UK domicile of origin.

The people falling into this group are called “previously domiciled residents” for tax reasons, and they have a separate, stricter, and faster set of tax laws. They are treated as UK domiciled for IHT purposes from the beginning of their second tax year of continued UK residency, resulting in their international estate being exposed to UK IHT (with limited exceptions).

Additional and more immediate tax implications exist for income and capital gains. Formerly domiciled residents are treated as UK domiciled for income tax and CGT when they are UK residents for the tax year; therefore, they cannot utilise the remittance basis of taxation. As a result, UK residents are taxed on their international income and gains as they arise, no matter where.

Trusts are often used in Hong Kong, and ex-pats who live there have been doing so for a long time. Adopting the laws that apply to previously domiciled residents has, nonetheless, brought about a substantial shift in how the trusts that these individuals resulted are treated.  If the settlor is allowed to benefit from the trust, they are responsible for all income and gains. However, it is not enough that the settlor has not benefited since HMRC taxation is not restricted by the extent the individual has profited from the trust, just that they are not explicitly excluded.

If the trust is located in the United Kingdom, it will be subject to UK relevant property system, which determines how trusts are taxed here. The trustees are subject to inheritance tax through both UK and foreign assets if the settlor is considered domiciled for inheritance tax under the previously domiciled resident rules.

Any planned trust disbursements should be carefully evaluated to prevent foreign assets from being subject to inheritance tax. If a distribution is needed, it may be best to make it while the settlor is a non-UK resident or inside the one-year inheritance tax grace period under the previously domiciled rules.

As usual, tax is unlikely to be the decisive factor in a family’s transfer, but the adage “time invested in preparation is rarely wasted” may be accurate regarding moving to the UK and its tax consequences.