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I am 58 years old and a UK citizen who has lived in Hong Kong for 12 years. I have three children, all of whom are adults, and two grandchildren, all based in the UK. I own a UK property and hold an investment portfolio in Hong Kong. I understand that the scope of inheritance tax changed recently. What are the changes and how will they impact me?
Anna Warren, tax director at Bentley Reid, says that, historically, an individual’s liability to inheritance tax (IHT) was based on the concept of domicile. While there were several types of domicile, it was broadly based on where your father was domiciled at birth, and where you intended to live permanently.
This could bring uncertainty for individuals who had lived outside the UK for long periods as to whether they would be subject to UK IHT. The UK has since shifted to a residence-based system and a person’s IHT liability now depends on whether they are a long-term resident (LTR) — a UK tax resident for at least 10 of the previous 20 tax years. IHT affects a long-term resident’s worldwide assets, whereas a non-LTR would only be subject to IHT on their assets held in the UK.
Your IHT liability will depend on whether you plan to stay in Hong Kong long term or not. Broadly speaking, you should be able to create a tax- efficient succession plan.
Taking a look at your assets, your UK property will be subject to inheritance tax, but your Hong Kong investment portfolio would be considered outside of scope.
You could therefore consider a few options. First, via gifting. Gifts made to another individual are generally considered potentially exempt transfers (PETs), which broadly require the donor to survive seven years for the gift to be exempt from IHT. If you are a non-LTR at the time, gifts of non-UK assets will be outside the tax scope and no IHT will arise.
Next, you could explore the use of settling assets into an offshore trust. There should be no IHT when transferring non-UK assets into a trust. An individual who is an LTR (or previously UK domiciled) cannot put assets into a trust without an immediate 20 per cent IHT charge on the value above the nil-rate band. The use of trusts can give wider succession planning benefits, especially when not wanting to make outright gifts. The long term IHT implications of the trust will depend on the LTR status of the settlor and whether they are excluded.
Then, you could also think about utilising a family investment company — this vehicle can be a way to gift assets to children while retaining an element of control.
Our next question
My brother and I share a family trust fund and were in business together, but he has recently moved to Dubai and I am concerned we are heading for a falling out because of money he borrowed from me, which has yet to be repaid. I am looking for advice on how best to protect joint family assets now he has moved abroad. How can I ensure that I can be repaid what I am owed?
These new rules mean that long-term non-resident individuals have a clearer understanding of whether they are subject to IHT. Those who are non-LTR have more flexibility to plan and potentially protect their non-UK assets from UK IHT.
This all comes with the caveat that any succession planning is totally dependent on your individual circumstances.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.
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