A lawyer at Kingsley Napley discusses some of the tax and other issues those wanting to take up a visa in the UK must consider.

This year is the 25th anniversary of Hong Kong’s return to China. The former British colony has been through a number of changes; controversially, Beijing imposed a national security law on Hong Kong in 2020 following protests against a change to extradition rules that some argued was a violation of the UK/China handover agreement. Hong Kong has also been subject to draconian “zero-Covid” rules, which are starting to ease off. For various reasons, therefore, several people are considering leaving Hong Kong. How significant that exodus is remains to be seen. 

Last year some 90,000 people left Hong Kong; figures already suggest that the numbers will be higher this year – 140,000 residents departed 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 for up to five years has proved attractive. The Daily Telegraph recently reported that the town of Sutton in South London has proved a magnet for those arriving and returning. What are the tax considerations for this cohort?   

To discuss some of these issues is Laura Harper, partner in the private client team at Kingsley Napley, a London-based law firm. The editors are pleased to share these views and invite responses. The usual disclaimers apply to views of outside contributors. Email tom.burroughes@wealthbriefing.com

The Hong Kong British National (Overseas) visa was formally introduced on 31 January 2021, and has already attracted more than 65,000 applications. The visa is available to those who have British National (Overseas) citizenship and their eligible dependants but careful consideration needs to be given to the tax position prior to or at the same time as making this application. 

This is primarily because one of the key factors in determining an individual’s liability to UK tax is their residence status which is determined by the Statutory Residence Test. This is a complicated test, consisting of various sub-tests which are used to determine if and when an individual will be subject to income and capital gains tax in the UK and, at a later date, to 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 are keeping offshore will be taxed. Special tax treatment is available to individuals who are resident in the UK but not domiciled or deemed domiciled here through use of what is known as the “remittance basis” of taxation for a period of up to 15 out of the 20 previous tax years.   

Individuals who are taxable on the remittance basis are subject to UK income and capital gains tax in the same manner as domiciled individuals on their UK source income and gains. However, their foreign source income and gains are taxed by the UK only if and to the extent that they are remitted to the UK, so if they receive, use or benefit from these funds in the UK. 

The remittance basis is applied automatically only if the foreign source income and gains of an individual are below £2,000 ($2,365) so it will be important to make sure that use of the remittance basis is carefully considered and claimed if offshore income and gains are to be kept outside the UK tax net. From the seventh year of use, a fee is charged by HM Revenue & Customs for continued use of the remittance basis starting at £30,000. 

The recent developments in Hong Kong have also resulted in a mass return of expats who left the UK to pursue lucrative career opportunities in the 1970s and 80s. However, special consideration of the tax position needs to be taken by those who were both: 

•    born in the UK; and 
•    acquired a UK domicile of origin at birth.

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

There are also income and capital gains tax consequences which apply even more rapidly. Formerly domiciled residents are simply treated as UK domiciled for income tax and CGT purposes where they are UK resident for the tax year, meaning that the use of the remittance basis of taxation is not available to them. The result of this is that such individuals (on the basis that they are UK resident) are taxable on their worldwide income and gains by the UK as they arise, regardless of where that may be. 

The use of trusts is common in Hong Kong and has long been an established practice by expats residing there. However, the introduction of the formerly domiciled residents’ rules has resulted in significant change to how the trusts they settled are treated. 

The trust of which they are the settlor are chargeable on all trust income and gains as they arise if the settlor is permitted to benefit from this trust. It is not enough that the settlor has not actually benefited because taxation by the HMRC is not limited by reference to the extent the individual has benefited from the trust, merely the fact that they are not expressly excluded. 

Additionally, the trust will be subject to the UK relevant property regime which governs the taxation of trusts within the UK tax net. As a result, when a ten-year anniversary of the trust occurs or if the trustees make a distribution of trust assets, the trustees are within the scope of inheritance tax on both UK and foreign assets if the settlor is deemed domiciled for inheritance tax under the formerly domiciled resident rules.

Accordingly, any proposed trust distributions should, therefore, be carefully considered to avoid any foreign assets becoming subject to an inheritance tax charge. If a distribution is required, it may be worth making this at a time when the settlor is non-UK resident or still within the  one-year grace period for inheritance tax under the formerly domiciled rules. 

As always, tax is unlikely to be the deciding factor in a substantive relocation of a family but the old adage of “time spent in preparation is seldom wasted” can be very true when it comes to the tax implications of a move to the UK.