The Wide Net of UK Inheritance Tax

The Wide Net of UK Inheritance Tax

The Wide Net of UK Inheritance Tax 1200 801 Alfred Ip

Since 11 February 2006, inheritance tax in Hong Kong has been abolished. Practically this means that, after a person’s passing, their assets will pass to their loved ones free from any tax. Additionally, certain taxes that would normally apply, are exempt on death. In particular there is an exemption on stamp duty on transfers arising on death, which usually applies on inter-vivos transfers of immovable property and Hong Kong stock. This may give security of mind when considering how your assets will be treated after you pass. However, one should be wary of foreign owed assets and overseas jurisdictions’ tax implications.

The question of domicile

Even if you currently live and work in Hong Kong, from a UK perspective, you may still be considered domiciled in the UK. Once a Hong Kong person is deemed a UK-domiciled person, their worldwide assets will be caught by the net of UK inheritance tax at a rate of 40%, subject to any specific reliefs or exemptions.

The question of domicile is a complex one. The important point to note is that domicile is not the same as residence. Establishing if you will be classified as domiciled in the UK for inheritance tax purposes is often difficult. If you are concerned, you should consult a specialist to advise on your position.

UK-owned assets

Regardless of your domicile status, if you own UK assets these assets will attract UK inheritance tax.

Before 5 April 2017, this could be circumnavigated for UK residential properties. They could be owned by overseas companies (“enveloped”) which, in general, rendered them exempt. Now, all UK residential properties are liable no matter how they are owned.

Non-UK assets are ‘excluded property’ and outside the scope of UK inheritance tax (provided domicile in the UK is not established).

UK inheritance tax rules

If you leave your UK assets to your spouse or civil partner, you will not be subject to any UK inheritance tax. This exemption does not extend to couples merely in relationships, the relationship needs to have legal standing.

Inheritance tax is charged at 40% of the value of the assets (your estate) over GB£325,000 (approximately HK$3,048,000). The GB£325,000 threshold is known as the “nil-rate band”. Residential homes left to direct descendants, such as children (including foster, adopted or step-children) or grandchildren, but not nieces or nephews, will also benefit from a GB£175,000 residence nil-rate band.

Practically, this means that if you own UK assets that are worth less GB£325,000, they will not be subject to any UK inheritance tax. Further, if such estate fully comprises of a residential home, is passed on to a direct descendant and is worth less than GB£500,000, then the estate will not be subject to any UK inheritance tax.

Married or civil partners can inherit any unused nil-rate band from their partner, meaning there is a potential total allowance of GB£1,000,000.

So, let’s say a Hong Kong person:

  • owns a property in the UK worth GB£1,500,000 and has left such property in their Will to their child.

GB£1,000,000 of the property will be subject to inheritance tax meaning the estate will be charged GB£400,000 UK inheritance tax.

  • owns a property in the UK worth GB£1,500,000 and has left such property in their Will to their child and had a married partner who predeceased them and left everything to them.

They will inherit their partner’s inheritance tax allowances as they will have received their entire estate, which would not have been subject to any inheritance tax as they were married. GB£500,000 of the property will be subject to inheritance tax meaning the estate will be charged GB£200,000 UK inheritance tax.

If your estate is worth above GB£2,000,000, the residence nil-band rate (GB£175,000) starts to reduce by GB£1 for every GB£2 above GB£2,000,000, meaning at GB£2,325,000 the residence nil band rate is lost altogether.

So, let’s say a Hong Kong person:

  • owns a property in the UK worth GB£2,000,000 and has left such property (which comprises their whole estate) in their Will to their child.

GB£1,500,000 of the property will be subject to inheritance tax meaning the estate will be charged GB£600,000 UK inheritance tax.

  • owns a property in the UK worth GB£2,325,000 and has left such property (which comprises of their whole estate) in their Will to their child.

Only the standard nil-band rate will apply as the residence nil band rate will be lost altogether. GB£2,000,000 of the property will be subject to inheritance tax meaning the estate will be charged GB£800,000 UK inheritance tax.

Gifting your assets during your lifetime

Consideration should be given to who you are gifting your assets to. Gifts to charities, political parties or your married/civil partner will not be subject to any inheritance tax. What’s more, if you leave 10% of your UK estate to charity your level of UK inheritance tax will fall to 36%.

Generally, you can give as many gifts of cash or assets as you want, provided they are worth GB£250 or less and provided you haven’t used another gift allowance on the person you are gifting to in that same year.

Anything more than GB£250 will be subject to UK inheritance tax, unless you live for seven years after making such gift, in which case it will not be subject to any. If you do pass within seven years of making such lifetime gift, it will be subject to UK inheritance tax and will eat into your GB£325,000 nil band rate. The amount of tax due after your death depends on when you gave the gift.

Gifts, over the GB£325,000 tax-free threshold, given in the in the 3 years before your death are taxed at 40%. Gifts,  over the GB£325,000 tax-free threshold, given 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’.

The UK government also gives a lifetime gift allowance of GB£3,000 a year meaning, if you gift is worth GB£3,000 or less, your gift will not be subject to any inheritance tax and will not eat into your nil-band rate.

So, let’s say a Hong Kong person:

  • gifts their child GB£5,000 and does not pass for another 8 years

The life-time gift will not be subject to any UK inheritance tax

  • gifts their child GB£3,000 and does not pass for another 5 years

The life-time gift will not be subject to any UK inheritance tax.

  • gifts their child GB£5,000 and does not pass for another 1 year

GB£2,000 of their life-time gift will be subject to UK inheritance tax meaning their nil-band rate will be reduced to GB£323,000.

You could decide to spread out your gifts and gift your children GB£3,000 a year or less and this would not be subject to any UK inheritance tax.

Additionally, each tax year, you can give a tax free gift to someone who is getting married or starting a civil partnership. You can give up to GB£5,000 to a child, GB£2,500 to a grandchild or great-grandchild and GB£1,000 to any other person.

Although you may avoid the burden of UK inheritance tax by passing lifetime gifts to your loved ones, you should be wary of capital gains tax as, unlike Hong Kong, this applies in the UK.

UK capital gains tax has a specific rules and rates, but broadly speaking:

  • it is not chargeable on married and civil partners, nor charities;
  • when it is charged, it is charged at either 10% or 18% for basic rate taxpayers. For higher or additional rate taxpayers, the rate is either 20% or 28%; and
  • there are specific reliefs and exemptions depending on what the asset is, the value of the asset and who the asset is being passed to.
The importance of planning

As is evident from the factors that should be considered when making lifetime gifts, it is vitally important you structure your UK assets and the timing of gifts in a way that considers how they will be treated when you pass. There is no one-size fits all, each person’s estate plans will vary.

Some useful estate planning methods include:

  • Paying into a pension
  • Taking out an insurance plan
  • Setting up a Family Trust
  • Investing in companies that qualify for business relief
  • Spending your money in a manner that accounts for your UK inheritance tax implications

Hugill & Ip has extensive estate planning experience and continually helps clients arrange their estates in the best way possible factoring in all aspects, including the possible effects of holding foreign assets. If you hold UK assets, we can advise on how these may be treated and how best to structure these from a Hong Kong perspective, whilst also taking into account the UK impacts.

 

Every situation is different and needs bespoke advice, so please do not hesitate to contact our Private Client team for specific enquiries.

This article is for information purposes only. Its contents do not constitute legal advice and readers should not regard this article as a substitute for detailed advice in individual instances.

Alfred Ip

Alfred assists high net-worth individuals (HNWIs) in handling their wealth-related issues, such as contentious and non-contentious trust and probate, mental capacity, family office, amongst other wealth management matters. He is also a leading Dispute Resolution lawyer with over 20 years of experience in Hong Kong. Moreover, Alfred helps clients with issues regarding Family Law.

All articles by : Alfred Ip
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