Over the past few months, I have received enquiries from a number of Hong Kong citizens who are interested in relocating to the UK, writes Simon Denton, Managing Director of Sovereign (UK) Ltd. One family of four, in particular, has decided to formally relocate to reside in the UK as from September this year. The husband and wife, who work in interior design, are both currently under the pension retirement age of 55
As part of this planning, we compiled a dedicated UK tax report for the HK client family to ensure that they have a clear understanding of the UK tax system and can make pre-arrival tax planning a priority. UK income tax rates of up to 45% are generally much higher than those in Hong Kong, while the UK also levies tax on capital gains and inheritance. This report emphasised the need, prior to their move, to ensure that their overseas financial accounts are properly ‘segregated’.
An individual who is resident and domiciled (or deemed domiciled) in the UK will pay UK tax on the arising basis. This means they will pay UK tax on their worldwide income and gains regardless of whether they bring the income or gains to the UK.
An individual who is resident and not domiciled in the UK will have the choice of being taxed on the arising basis or remittance basis of taxation. By using the remittance basis of taxation, they only pay UK tax on UK-sourced income and gains but only pay UK tax on foreign income and gains if they are brought (remitted) to the UK.
‘Clean capital’ (offshore funds that do not represent non-UK income or gains arising after the commencement of UK residency) can be brought to the UK without a tax charge, and it is therefore essential for remittance basis users to segregate their offshore income and gains from any clean capital funds. Typically, at least three separate bank accounts should be maintained – one for clean capital, one for income and one for capital gains.
As of 31 January 2021, a new British National Overseas (BNO) Visa became available to BNO citizens and their close family members. It permits Hong Kong citizens with BNO status to come to the UK with their close family members for five years. After five years of residence in the UK, they will be entitled to apply for settlement – termed ‘indefinite leave to remain’ – and after one further year of residence to apply for British citizenship.
BNO Visa holders are able to work or study freely in the UK, including applying for higher education courses. Although they will not generally be entitled to claim benefits, they will be able to use the UK National Health Service (NHS).
The HK client family have two young children, so sourcing a relevant school was an important objective. This issue was resolved by working with our specialist educational consultant.
Acquiring UK residential property
The HK client family intend to purchase a main UK home but are also looking to take advantage of low mortgage finance rates. We have therefore sourced, via an associate property-sourcing specialist, a suitable rental property on a six-month Assured Shorthold Tenancy, with the ability to renew this tenancy until such time as the HK family has found a suitable property to purchase.
We have also arranged indicative mortgage finance quotes for the proposed purchase of a £3 million UK residential property. It is likely that such a property will be purchased next year but within the current UK tax year (before 5 April 2022).
The husband and wife could purchase a UK residential property in their joint names, creating a new UK will to maximise the UK inheritance tax (IHT) exemptions and allowances, the most important of which are the spousal exemption, nil rate bands and transferrable nil rate band between spouses. With careful planning, the husband and wife should be able to ensure that they receive a total combined nil rate band of GBP 1m based on today’s rates. They may then wish to simply cover their UK IHT exposure by taking out a suitable life insurance policy that is tailored to their circumstances. The UK property is likely to be the only significant asset within their estate which gives rise to an IHT problem for the family.
The HK client family could decide to put in place some tax planning by purchasing the UK residential property through a “carve-out trust”, which should provide the following benefits:
- No chargeable lifetime transfer (CLT) for IHT purposes as cash held in an overseas bank account will be settled into the carve-out trust before the funds are remitted into the UK. It is essential that the funds settled are clean capital. Great care is needed at this stage of the planning.
- The Annual Tax on Enveloped Dwellings (ATED) does not apply to trustees.
- Private residence relief (PRR). PPR is available to trusts where at least one of the beneficiaries meets the relevant criteria, to be applied each tax year.
- There should be no UK IHT on death of any of the beneficiaries’, including the death of the settlor. Careful planning is required to structure the trust correctly, with particular attention given to the position of the settlor.
NB: although the carve-out trust should provide IHT planning, the trustee of the trust will be subject to the charge on each ten-year anniversary of the trust, at least while the UK property remains held within it.
UK Corporate Planning
The UK company will be subject to UK Corporation Tax on net profits, but generous deductions will be permitted such as a contribution of pre-taxed profits into a UK registered pension for each director, director and officer insurance, professional indemnity insurance, medical insurance, public liability insurance and travel insurance for the family.
If each director receives a basic salary of less than £50,000 per year, they will pay only the basic 20% rate of UK Income Tax plus employee’s national insurance of 12%. Additional remuneration, if needed, can be taken in dividends. Investments of a diversified nature should be made by the UK company, since UK Corporation Tax is still 19% whereas the top rate for dividends falling within the additional rate of tax with income over £150,000 is 38.1% (this makes reinvesting tax paid profit within the company more attractive than distributing out to the family shareholders).
Offshore Trust planning
An Excluded Property Trust (EPT) in the Isle of Man will enable the HK client family to hold their non-UK sited investments under trust. The settlor(s) must not be UK-domiciled or deemed domicile for IHT purposes when they create the trust, which allows the trust assets to be excluded from the taxable estate of the settlor(s) for IHT purposes on death. This exclusion applies even if the settlor(s) become UK-domiciled or deemed domiciled for IHT purposes after the creation of the trust.
As the settlor(s) are non-UK domiciled, when excluded property is transferred to the trust there will be no CLT charge because the transfer is exempt under the excluded property rules.
In this case the non-UK sited investments would include: overseas cash savings of which a significant amount is currently held in Hong Kong-based institutions; an investment portfolio that can be transferred in-specie; the share capital owned by one spouse in private Hong Kong companies; shares in a Singapore-based Family Investment Company and a collection of antiques and paintings that are currently held in overseas storage.
A trusted overseas advisor who understands these assets can be appointed as a trust protector, to act as an independent third party with the authority to perform certain duties concerning a trust. These powers are limited to specific powers, usually to veto certain trustee decisions.
The trustees will open a bank account with an overseas institution that can offer private banking and wealth management services in close geographic proximity to where they will be residing, such as the Isle of Man and Switzerland. As a result, income, gains and growth of the trust fund should not be exposed to UK taxation.
Distributions paid from the EPT into the non-UK bank account of a beneficiary should generally not be exposed to UK taxation provided the funds are not remitted to the UK.
The assets of the trust will not form part of the client family’s estate for as long as they remain within the trust. The trust fund must continue to hold excluded property. Once the client has acquired a domicile of choice within the UK or is deemed domiciled in the UK, they should not add any further assets to the trust. The trust fund will not be subject to IHT providing it holds ‘excluded property’.
For further information on any of this planning for the referenced HK client family, please contact Simon Denton.