Tax advice essential for anyone from Hong Kong moving to the UK or buying UK property

As of 31 January 2021 a new UK visa will be available to British National (Overseas) citizens (BNOs) in Hong Kong and their close family members. Under the new route, the details of which were presented to parliament on 22 October 2020 in a Statement of Changes to the Immigration Rules, the UK government estimates that 5.4 million Hong Kong residents will be eligible to move to the UK and eventually become British citizens.

BNO status was created by the Hong Kong Act 1985 as part of the negotiations for the Sino-British Joint Declaration treaty of 1984. Most residents of Hong Kong were then classed as British Dependent Territories citizens but in the ten years before the UK’s handover of Hong Kong to China in 1997, these citizens were entitled to apply for BNO status in order to retain a connection with the UK after the transfer of sovereignty to China.

The UK government changed the rights attached to BNO status and introduced the new immigration route following the enactment by China of a new National Security Law to apply to Hong Kong on 30 June 2020. The UK said that the new law was a “clear and serious breach of the Sino-British Joint Declaration and undermines the ‘one country, two systems’ framework”.

The change allows BNO visa holders 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. Close family members would usually have to live with the BNO visa holder and include:

• Spouse, civil partner or unmarried partner;
• Children or grandchildren under the age of 18;
• Adult children born on or after 1 July 1997 (and their spouse, or child under the age of 18);
• Other family members – such as a parent, grandparent, brother, sister, son, or daughter – but only in “exceptional circumstances of high dependency”.

BNO visa holders will be 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 National Health Service. There is no limit on the number of eligible people who can come under the new route.

BNO status is valid for life, but cannot be passed on to spouses or children. Although there are only around 400,000 BNO passports currently in circulation – with around 200,000 applications pending – the UK government said there were around 2.9 million BNO citizens in total. It estimates that, with dependents and members of family units, a further 2.5 million Hong Kong residents will be eligible to come to the UK under the new route.

Any BNO citizens in Hong Kong who are looking to relocate or invest in the UK will need to ensure that they have a clear understanding of the UK tax system and should 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.

UK residents are generally taxed on the arising basis of taxation – all worldwide income and gains will be taxable in the UK even if your foreign income and gains have already been taxed in another country. In many cases, relief is given in the UK for foreign tax paid on foreign income and gains under the provisions of the relevant Double Taxation Agreements (DTAs) or via unilateral relief.

If you are UK resident but not domiciled in the UK – often referred to as a ‘non-dom’ – there are special rules that might apply to your foreign income and gains. You can choose, on an annual basis, whether to use the arising basis of taxation or the remittance basis of taxation on your UK self-assessment tax form. It should be noted that, since changes to UK tax law in 2017, British ex-pats returning to the UK are unable to claim non-domicile status.

The remittance basis of taxation is when you choose to be taxed only on your UK income and gains and only on foreign income and gains of £2,000 or more per year that you bring back to the UK. For the first six years of UK residency, it is free to claim for the remittance basis but, from the seventh year of UK residency, if you want to enjoy this favourable treatment there will be an annual charge known as remittance basis charge.

The remittance basis charge is £30,000 if you have been UK resident but non-domiciled for seven out of the last nine years, rising to £60,000 if you have been resident for 12 out of the last 14 years. Non-doms that reside in the UK for 15 or more years out of 20 are considered to be deemed UK domiciled and are no longer be able to pay the remittance basis tax charge, therefore their worldwide income and gains will be subject to UK taxation. Furthermore, their worldwide assets will also be liable to UK inheritance tax (IHT).

Those moving to the UK from Hong Kong will also be faced with complexities of acquiring and owning a main residence in the UK. The UK property market has been a magnet for Hong Kong investors and continues to attract investment, but UK tax laws have changed substantially in the last decade to the detriment of overseas investors. These changes include:

• Increase in Stamp Duty Land Tax (SDLT) for higher value residential properties (the top rate is now 15%);
• A 3% SDLT surcharge for purchasers of second homes and for corporate purchasers;
• An additional 2% SDLT surcharge is be levied (from April 2021) on foreign investors purchasing UK residential property;
• UK residential property will generally, with some exceptions, be subject to UK Inheritance Tax (IHT) regardless of whether the asset is held by a non-UK structure;
• Disposals of UK property assets will, with limited exceptions, be subject to UK capital gains tax, regardless of where the investor is resident;
• Net UK rental income will be taxable in the UK.

With a long-standing presence in both Hong Kong and the UK, Sovereign can help you understand the complexities of the UK tax system and ensure that any purchases are structured efficiently to maximise returns and minimise tax liabilities.

Pre-residence planning is essential for all individuals considering working or living in the UK, especially for non-UK domiciled individuals, and this should be effected at the earliest possible stage. There will also face increased regulatory requirements to achieve compliance with anti-tax avoidance and anti-money laundering regimes.

Sovereign has significant expertise in advising international clients in how to purchase UK property assets and we specialise in the formation and management of UK and overseas companies, overseas trusts and international pension schemes. If you or your clients are considering moving to the UK or purchasing any UK property asset please contact us immediately for an in-depth consultation without obligation.