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New emigrants to the UK from Hong Kong coming to live in the UK – the risks and steps to take

New emigrants to the UK from Hong Kong coming to live in the UK – the risks and steps to take

From 31st January 2021, a new British visa is available for Hong Kong British National (Overseas) citizens and their close family members. This serves to highlight a particularly unfortunate tax pitfall that can trip up the unwary.

Based on our experience of HMRC’s approach, we think it is likely that HMRC will argue in many cases that such individuals become UK domiciled for tax purposes as soon as they arrive. You are UK domiciled if you begin to live here and intend to make your home here until the end of your days unless and until something specific happens. Where someone’s hope of returning home depends on very significant political change happening in their homeland, HMRC tend to regard this as too vague an intention to prevent UK domicile being acquired.

If someone applies for citizenship, and states that they intend to remain permanently in the UK, then that will be regarded as evidence that they have acquired a domicile of choice in the UK.

This problem of immediately acquiring a UK domicile of choice is obviously not unique to Hong Kong residents. From a tax perspective, someone coming to live in the UK in these circumstances will be UK tax resident and domiciled and subject to UK tax on their worldwide income and gains, and to UK inheritance tax on the whole of their worldwide wealth. This means they will not be able to utilise the remittance basis of taxation favoured by many non-doms.

For someone with significant wealth, it is worth considering investing this in a single premium offshore life assurance bond. Such bonds are subject to a specific tax regime; income and gains which arise within the bond are not subject to UK tax even where the bond is held by a UK resident. It is then possible to withdraw each year 5% of the original premium, without any UK tax charge. This means that if a non-dom individual invests in such a bond and puts the bond into trust before they become UK resident, then the trustees can make 5% annual withdrawals of the premium to pay to the individual, tax-free, and also the investment return in the bond is not subject to UK income or capital gains tax, and the assets are outside the scope of UK inheritance tax. There is an income tax charge on withdrawals from the bond after the original premium has been extracted, which is again subject to a specific regime which can significantly reduce the effective rate.

If the investment in the bond is not made until after the individual has arrived in the UK and a UK domicile of choice has been acquired, then it is within the scope of UK inheritance tax and in general there would be a tax charge on putting it into a trust. However, such bonds are usually written in £10,000 tranches, so that they can be used to make gifts to (for example) family members as potentially exempt transfers.

Often, someone coming to live in the UK for the first time would set up a “protected trust”, before they arrive, but if they become domiciled immediately, then the income and capital gains tax advantages of such a trust are immediately lost. However, if a trust is settled before a person comes to the UK, and it invests in non-UK situs assets, then the assets can be outside the scope of UK inheritance tax, and in particular, outside the scope of the 6% ten-yearly anniversary charge on trusts.

Domicile depends on a person’s particular circumstances, and specific advice should always be taken. There are steps that can be taken before arrival to improve the UK tax position, but this is heavily dependent on the facts and individual circumstances.

If you would like to discuss this topic in more detail please contact us