Estate Taxes for Hong Kong Residents: Dying Can be an Expensive Business

By Howard Bilton

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Summary: Despite the abolition of the estate duty in Hong Kong, many residents of Hong Kong are subject to estate duties or inheritance taxes by other countries, where they have investments or are domiciled.

Hong Kong - Inheritance Taxes for Expats

Most people prefer not to think about their own death, naturally enough, but failing to do so and to plan appropriately can be a very expensive business. Not for you because you are dead. It's your family who end up losing out. If you are young, healthy and single, you can stop reading now. If you have a spouse (whom you like) and/or some children, then the following is important.

After the abolition of estate duty in Hong Kong many people mistakenly believed that they no longer needed to consider estate duties or inheritance taxes as they are called in some places. For most wealthy Hong Kong residents that isn't true. Most will have investments outside Hong Kong and frequently those assets will be subjected to "death taxes" by the country in which they are located irrespective of who owns them. Obviously, the older you get, the more important it is to have your affairs in order. But, unhappily, people do die at unexpectedly young ages, so it is never too early to start. So unless you know when you are going to die so can leave planning until nearer that time start now. There is supposedly one way of finding out when you are going to leave this mortal coil. Check out www.deathclock.com and input some simple information about yourself. It will immediately give your exact time and date of death. I don't think it would be wise to rely on this.

To illustrate what I am talking about let’s consider the example of a UK national who is a long term resident of Hong Kong who has:

1. A nice London pad worth BP 2 million.

2. A collection of fine wines stored in London worth BP 150,000

3. A holiday home in Spain worth Euros 3 million

4. A large portfolio of shares in US public companies which haven’t gone bankrupt….. yet valued at US$ 2.5 miilion

5. A property in Hong Kong in which he lives with his US national wifevalued at HK$ 4 million.

The first thing to note is that as he is a UK national he might well be considered domiciled in the UK despite his long term residence in Hong Kong. If he is, then his worldwide estate would be subject to UK inheritance tax at a rate of 40%. Ordinarily, transfers between husband and wife are exempt from UK inheritance tax, but only if both are UK domiciled. As his wife is a US national, she could not be domiciled in the UK, so the tax will bite. It is possible to establish an alternative "domicile of choice" outside the UK and therefore rid yourself of the liability to UK inheritance tax on your worldwide estate but it's extremely unwise to just assume that liability isn't there. Even if Mr X was not UK domiciled, then his UK assets would still be subject to UK inheritance tax at 40% due to their situs. So, 40% of the value of the property and the fine wine is going to have to be paid over to the UK tax man. The portfolio of shares in the US would be subject to US inheritance tax. The property in Spain would be subject to Spanish inheritance tax and also "forced heirship" laws which mean you have to leave the property 1/3 to the spouse, 1/3 divided equally amongst the children and the other 1/3 is the free estate which you can do with as you please. That may not be as Mr X wished and is an additional consideration over and above the tax that would be payable in Spain. The Hong Kong property would not be subject to estate duty in Hong Kong because there isn't any. If he is UK domiciled, the whole estate would still be subject to UK inheritance tax at 40% and he may therefore be double taxed on the same assets.

Mrs X is likely to think rather less fondly of Mr X if he leaves all these assets to be sorted out by his executors because not only will the tax have to be paid but it will probably take around 2 years to go through the probate process in each of the countries in question and have the assets released to the executors who can then dispose of them and release the proceeds to Mrs X.

The good news is that to a certain extent it is true to say that estate taxes are quite voluntary. They are a lot easier to plan against than most forms of tax. In simple terms the correct strategy is to transfer the various different assets to companies appropriately selected for the jurisdiction in question and then place the shares of all those different companies into a foundation, guarantee holding company structure, trust or the like. By doing this you convert the different assets into the interest in the holding structure which can be carefully structured to avoid any need for probate and, in many cases, any need to pay inheritance tax.

Transferring the assets to the structures would normally represent a sale of each asset; therefore, capital gains tax may be payable in it's country of situs (not in Hong Kong, because again we don't have capital gains tax). I suppose the only good news to come out of the credit crunch is that values are likely to be historically low so now is as good as time to do it as any. Silver cloud etc., but you can see that you either pay the CGT or your estate pays the death tax. One way or another they get you.

If Mr X is indeed still UK domiciled then he would still be taxed on the value of his interest in the holding entity so it isn’t the perfect solution for him but for most other nationalities it may well be no more complicated than the above. If Mr X is unsure about his domicile then he needs to get certainty and work towards losing his UK domicile. Again the sooner he starts that the better. It is possible to change domicile and this is the holy grail for UK persons.

Of course, none of the above really applies to US persons because they pay full US taxes for as long as they hold a US passport.

About the Author

Howard Bilton is Chairman of The Sovereign Group. Sovereign’s core business is setting up and managing companies, trusts and other structures to meet the specific personal business needs of clients. Typically these needs would include tax planning, wealth protection, foreign property ownership and facilitating cross-border business.

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First Published: Jun 18, 2009

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