Moving to the UK? - a briefing for Hong Kongers on the UK’s beneficial tax regime for overseas families

Posted: 09/07/2021

The UK took a significant step to welcome Hong Kongers when it launched the Hong Kong British National (Overseas) (BNO) visa on 31 January 2021. With this visa, the UK Government has sought to remove many of the restrictions that hamper other visa categories. For example, the visa process is straightforward, the visa itself has limited restrictions, you can work or study and, more importantly, it leads to settlement on completion of five years in the UK.

London, in particular, has long been attractive to Hong Kongers as a place to educate children, do business and create wealth. Recent figures show that, in the period between July 2020 and March 2021, Hong Kongers bought USD 1.3 billion worth of residential property in London, accounting for 8.5% of the prime central London property purchases by foreigners last year. This is a strong indication of the level of interest in the UK as both a home and a destination for investment.

The UK is also attractive to families from overseas from a tax perspective. It is generally the case that an individual who is not originally from the UK and who lives in the UK temporarily will be able to enjoy a beneficial tax regime with limited exposure to tax on assets and income outside the UK.

In this briefing, we set out the main UK tax considerations for Hong Kongers, including when UK taxes apply and how individuals may live tax-efficiently in the UK.

The UK has a relatively complex tax system and this briefing is intended to be a summary of key points. Taking advice on your specific circumstances and in advance of becoming resident in the UK is highly recommended.

When do UK personal taxes apply?

The UK tax system for individuals is based on two distinct concepts: residence and domicile. They determine the extent of an individual’s liability to UK tax but, importantly, are distinct from residence for UK immigration purposes and from a person’s immigration status.

Residence

Whether an individual is UK resident or non-UK resident for tax purposes is determined under the UK’s Statutory Residence Test (SRT). Broadly speaking, a person is either resident or non-resident under the SRT for a particular tax year (which runs from 6 April to 5 April), based on factors including:

• the number of days the person is present in the UK;
• whether the person has a home in the UK;
• whether he/she works in or outside the UK;
• whether he/she has UK resident close family members; and
• the number of days the person has been present in the UK in previous tax years.

Non-resident individuals have very limited exposure to UK tax, other than UK source income such as income from UK property. Becoming UK resident will increase this exposure significantly, as set out below. It would also ideally be planned because there are tax planning options available to non-residents that are not available - either at all or to the same extent - to individuals who are UK resident.

It is possible to become UK tax resident inadvertently. Care is needed to avoid this if pre-arrival planning is likely to be needed before you make your move. Often, a move to the UK will be a gradual process involving any number of trips to the UK to view properties and schools etc. Over the course of a tax year, these short trips could add up to the extent that an individual becomes UK resident. Alternatively, as has been seen in the last year with global travel restrictions, an individual may come to the UK for a short trip but not leave the UK as originally intended and become UK resident inadvertently as a result. While this is not an insurmountable issue, Hong Kongers who are already spending a meaningful amount of time in the UK should take advice on their UK tax residence status.

When a person becomes UK tax resident, reporting obligations to the UK tax authorities, HM Revenue & Customs (HMRC), can start to apply, whereas reporting obligations for non-residents are very limited.

In terms of liability for UK personal taxes, the default position for a UK resident individual is that they are subject to UK income tax and capital gains tax (CGT) on their worldwide income and capital gains. Unlike in Hong Kong, this includes investment income and gains. However, as set out below, individuals who are UK resident but non-UK domiciled can access a beneficial tax regime which can significantly limit their exposure to these taxes.

It is worth noting that if an individual is looking to acquire permanent residency with the BNO visa, they will need to make sure that their absences from the UK do not exceed 180 days in any 12-month period.

Domicile

Domicile is a common law concept which is very broadly based on where an individual has his permanent home. Generally, an individual inherits his domicile from his father at birth but this may be displaced by a new domicile if an individual moves to a new jurisdiction with the intention of remaining there permanently or indefinitely.

Notwithstanding domicile under common law, an individual may be deemed domiciled in the UK for tax purposes. Most notably, this would be the case where an individual is a ‘long stayer’ in the UK.

Domicile is significant for UK tax purposes because:

• a non-UK domiciled (and not deemed domiciled) individual may claim the remittance basis of taxation in relation to their non-UK income and capital gains; and
• an individual who is non-UK domiciled (and not deemed domiciled) is only subject to inheritance tax (IHT) on their UK situated assets and certain offshore assets that derive their value from UK residential property.

An individual would generally have a strong argument for claiming that they are non-UK domiciled if it is clear that they are only living in the UK temporarily and can point to a particular time in the future when they will leave the UK.

However, there is always a risk of a domicile challenge by HMRC. A person who moves to the UK because of political or economic instability in their country of origin may face enquiries into whether there is a realistic prospect of the person returning to that jurisdiction (or moving to a third country). If there is not, it could be inferred that the person intends to make the UK their permanent home and that they have acquired a domicile of choice in a part of the UK as a result.

As domicile is based upon the person’s subjective intentions, as demonstrated by individual facts and circumstances, any number of factors would be looked at and coming to the UK on a BNO visa would not, by itself, point one way or the other.

Steps can be taken to minimise the risk of challenge to the domicile status of Hong Kongers who are looking to move to the UK and for whom the tax advantages of that status are important.

The remittance basis

As noted above, the default position for an individual who is UK resident is that they are subject to UK tax on their worldwide income and capital gains. This is known as the arising basis of taxation.

However, where an individual is resident but non-UK domiciled (and not deemed domiciled), they may elect to be taxed on the remittance basis. This means that they are taxed, when resident, on their UK source income and gains as they arise, but non-UK income and gains arising in a year of residence are not subject to UK tax unless the income or gains are remitted to the UK.

In short, the remittance basis gives a UK resident, non-UK domiciled individual the ability to shelter non-UK income and gains entirely from UK tax provided they are not remitted to the UK. Unlike the Hong Kong territorial basis of taxation, the tax shelter under the remittance basis is conditional on avoiding remittance to the UK.

‘Remittance’ is widely defined but broadly speaking it means that the income or gains are brought to or used in the UK by the taxpayer or a person or entity closely connected to them. Examples would include:

• transferring non-UK income and gains from an overseas investment portfolio to a UK bank account;
• paying a foreign credit card that has been used in the UK with non-UK income or gains;
• acquiring a UK residential property using non-UK income or gains or servicing an overseas mortgage for a UK residential property using non-UK income or gains.

Advice should be taken on these rules to maximise the benefit of the remittance basis and ensure that UK taxes are not triggered because non-UK income or gains are inadvertently remitted to the UK.

An individual may claim the remittance basis for free for the first seven (out of nine) years of residence and this makes the UK particularly attractive when compared to other jurisdictions.

After seven (out of nine) years of residence, a £30,000 charge must be paid to claim the remittance basis, and this charge increases to £60,000 after 12 (out of 14) years of residence. This is optional each tax year, hence it is possible to choose the most efficient basis of taxation each year. After 15 (out of 20) years of residence, an individual becomes deemed domiciled in the UK and the remittance basis can no longer be claimed.

Pre-arrival planning and advice

The ability to claim the remittance basis and the limited exposure to IHT for the first 15 years of UK residence means that the UK can be a very attractive place to live. This is particularly the case if advice is taken and planning undertaken, in advance of moving to the UK.

The aim of ‘pre-arrival planning’ is to arrange a person’s assets to create a source of tax-efficient funding for the person’s use in the UK. Some of the steps to consider are:

• to create a pool of funds that can be brought to the UK without a tax charge (often referred to as clean capital). This may include funds which have arisen before the individual becomes UK resident and gifts and inheritances. Typically, arrangements are made to ensure that the clean capital is kept separate from non-UK income (and possibly also gains) that arise when the individual is UK resident so that it remains available for tax-free use in the UK; and
• to rebase assets that are standing at a gain. The reason for this is that an individual’s assets are not rebased automatically on moving to the UK and this, in turn, means that an individual who sells an asset while UK resident would be subject to UK tax on the full amount of the gain during their entire period of ownership, rather than only the gain that has arisen during the period of UK residence. This is particularly advantageous when moving from a jurisdiction like Hong Kong which does not tax capital gains and where such rebasing can be executed tax-free.

There are other, more complex strategies that can be adopted, including through the use of trusts for long-term protection from UK IHT, income tax and CGT.

As part of pre-arrival planning, it is important that the person’s affairs are reviewed generally to identify any areas that may give rise to UK tax concerns. This may include advice on:

• investment selection as certain investments are tax-inefficient from a UK non-domiciled perspective. This would include certain offshore funds such as mutual funds, and life insurance policies;
• existing trusts of which the person is a settlor or beneficiary. The UK has complex rules which apply to non-UK resident trusts and steps may need to be taken before the person becomes UK tax resident in order to minimise the impact of those rules;
• existing trusts of which the person is a trustee (or holds significant control powers). An individual who is moving to the UK and who is a trustee of a trust (or holds significant control powers) may make that trust UK resident. Consideration should be given to the appointment of new trustees or reducing the control powers to UK ‘safe’ levels; and
• certain companies of which the person is a shareholder, director or de facto controller. Steps may need to be taken to ensure the profits of the company are not subject to UK corporation tax and also not taxed on the UK resident shareholder.

The family home

For an individual moving to the UK, the most significant investment likely to be made is the purchase of the family home. As such, it will be important to consider the tax implications and the method of funding the purchase. A tax-efficient will would always be recommended.

With regard to the tax issues, stamp duty land tax (SDLT) is payable on the purchase of land and property in England and Northern Ireland. Higher rates of SDLT apply to the purchase of UK residential property by non-UK residents, and where the purchaser owns other residential property anywhere in the world. However, reliefs are available and this may require specialist advice.

The acquisition of a significant asset in the UK would also raise the prospect of IHT on the death of the owner or on a gift of the property in the owner’s lifetime, and CGT on a sale or other disposal of the property.

As the best method of funding the purchase may be determined, in part at least, by UK tax considerations, it is advantageous to seek advice in advance of the purchase. The funding arrangements will depend on whether overseas funds can be used efficiently from a UK tax perspective and whether borrowing should be sought.

If a remittance basis taxpayer has created a source of clean capital before moving to the UK, this would be a tax-efficient way of funding the purchase. If not, the individual may have to make a taxable remittance of foreign income and gains to fund the purchase. The use of a mortgage can be tax-efficient from an IHT perspective. However, advice should be taken on the funds that can be used to make repayments of capital and payments on interest on the mortgage from a remittance basis perspective.

A move to the UK is a significant event which gives rise to a number of tax and other considerations. The UK can be highly attractive from a tax perspective, provided the right structuring is undertaken at the right time. To achieve the optimal outcome, it is best to take expert advice in advance of moving especially with regard to eligibility under this visa route or other visa routes that may be available. Our private wealth team is able to help navigate these considerations.

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