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Emigrating Hong Kong HNWIs often oblivious of the need for proper tax planning

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Hong Kong HNW families considering emigration are advised to spend sufficient time on tax planning to avoid unpleasant surprises in their adopted countries.

Beijing’s tightening grip on Hong Kong is forcing many families to explore their options and rethink their futures. Some have decided to emigrate.

According to the Census and Statistics Department, Hong Kong’s estimated total population had dropped by 0.6% YoY by end-2020, representing 46,500 people exiting Hong Kong. This is the first time since 2003 that there has been a net reduction in population.

“We have observed a significant surge in relocation-related inquiries and many of them are unprepared in terms of wealth and tax planning,” Alfred Ip, partner at Hugill & Ip Solicitors told Asian Private Banker. “Some clients came to us with plans to relocate in a month, but without plans for arranging their assets to achieve tax efficiency.”

While in some cases it is possible to retain tax residency in Hong Kong, Ip reminded HNWIs to take note of the statutory residency test, which is fact-sensitive.

“Whether a taxpayer is a UK resident depends on the amount of time that he or she remains in the UK in a particular tax year, not calendar year,” explained Ip. “If a person becomes a UK resident in a financial year, his financial disposition that occurred within that financial year may become taxable, even before he or she arrived in the UK. Therefore, he or she should be advised prior to moving to the UK, not after.”

Since the UK’s tax year runs from 6 April to 5 April the next year, he suggested that families thinking of moving to the UK in the summer — in order to enrol their children at school for the next academic year — should plan at least six months ahead in order to find the right neighbourhood, school, house etc. and to allow ample time for wealth planning.

To generate the greatest cost-effectiveness, families with a net worth above US$5 million may consider setting up a pre-immigration trust so as to ensure the best tax efficiency, he added.

“Pre-immigration trusts can separate family wealth from an individual family member who would become UK-domiciled for inheritance tax purpose, saving a substantial amount of inheritance tax in future. It would also become a clean fund for future income and capital gain tax purposes,” he explained.

Portugal and Malta top enquiries
Dominic Volek, group head of private clients at Henley & Partners told Asian Private Banker that his firm saw an approximately 40% drop in the overall number of enquiries received in 2020 compared to 2019, but in general, the number of applications from Hong Kong nationals was about the same.

The firm’s data show that the five residency programmes most enquired about by Hong Kong nationals are those from Portugal, Malta, the UK, Singapore and Greece. While the Portuguese citizenship programme received the most enquiries, hardly any Hong Kong nationals applied, because Portugal offers a passport with full citizenship rights to anyone born in Macau before 1981 and Hong Kong nationals with a Macau connection often have other routes to obtain foreign residency.

Malta too is a popular destination as it offers a European passport to anyone investing €1 million in the country, without any local language literacy requirements and/or a minimum period of residency in Malta.

The programmes most applied for by Hong Kong nationals last year were the residency programmes of the UK and Australia, as well as the citizens programme of Malta and Montenegro.

Volek said Chinese or Asian HNWIs and their families have always been major clients of European citizenship applications for the ease of travel and diversification to the country-specific risk and global volatility. Therefore, such application doesn’t necessarily equate to permanently leaving their hometown. Over the past year, such clients have been looking at their third or fourth citizenship in Australia, New Zealand, or a Caribbean country.

Pandemic need for a second residency
The travel restrictions imposed by the COVID-19 pandemic have led affluent entrepreneurs and international investors worldwide to seek out jurisdictions with more lenient quarantine policies towards local residents (or jurisdictions where only locals are allowed to enter) and to build a diversified portfolio of domiciles in these jurisdictions that offer citizenship or residency in exchange for a certain investment.

Globally, Henley & Partners has seen a 32% increase in the average number of daily enquiries about citizenship/residency over a period of eight months, from early 2020 to the end of 1Q21.

In 2020, there was an astonishing 192% increase in enquiries from US citizens compared to 2019, and the number of applications from US nationals quadrupled from 2019 to 2020. Volek explained that the pandemic combined with the political sentiment under Trump seemed to have made US citizens rethink the need for a second residency, outside the US.

“In an increasingly unpredictable world, you need to diversify your geographical domicile options to guarantee and enhance long-term success — by securing access to top-quality education and healthcare, for example,” said Juerg Steffen, CEO of Henley & Partners. “You also need to reduce your exposure to risks such as higher crime, increased tax rates, political instability, social turmoil, poor governance, or unexpected policy changes.”

“Entrepreneurs and investors recognise that having a diversified portfolio of residencies and/or citizenships can add impetus to their wider wealth planning and legacy management strategies to protect against further downside and to create new value and enhance the well-being for the entire family.”

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