Hong Kong: Personal Taxation
The Revenue (Abolition of Estate Duty) Ordinance 2005 ["the Ordinance"] came into effect on February 11, 2006. No estate duty affidavits and accounts need to be filed and no estate duty clearance papers are needed for the application for a grant of representation in respect of deaths occurring on or after that date. The estate duty chargeable in respect of estates of persons dying on or after July 15, 2005 and before February 11, 2006 ("transitional estates") with the principal value exceeding HKD7.5 million will be reduced to a nominal amount of HKD100.
The old law is set out in the Estate Duty Ordinance. Estate duty had the following characteristics:
- It was based on the territorial principle and was thus only levied on property situate in Hong Kong. The deceased's nationality, residence or domicile were completely irrelevant in determining whether or not an estate duty charge arose. The following examples show when a charge arose and when a charge did not arise:
- Bank accounts: A charge arose if the bank account was located in the territory.
- Contract Debts: A charge arose on monies owing to the deceased by way of a contract debt if the debtor resided in Hong Kong.
- Registered Shares: Registered shares were located in Hong Kong if the share register is situated there.
- Bearer Instruments: were located at the place in which they were physically present at the time of death.<
- Patents and Trademarks: were located in the jurisdiction in which they can be transferred according to the law under which they were created or registered.
- Estate Duty Tax Rates: The tax was levied at progressive rates with no estate duty being payable where the value of the estate situate in Hong Kong was less than HKD962,000 and a maximum rate of 15% being levied on the value of assets exceeding HKD1,350,000.
- Controlled Company Legislation: A deceased shareholder could be assessed to estate duty on the value of Hong Kong situate assets owned by a resident or non resident company in which the deceased had a shareholding provided the company was deemed a "controlled company". The purpose of this legislation was to prevent avoidance of estate duty by the misuse of the corporate structure.
- Quick succession relief was available and meant that lower rates of estate duty were payable where assets changed hands frequently as a result of several deaths closely connected in time (under 5 years).
- Penalties for delayed payment are severe and include an interest rate of 8% per annum and the doubling of the rate of estate duty payable.
- For estate duty purposes no deduction was allowed for debts owing by the deceased except where those debts were contracted in Hong Kong to a person ordinarily resident in Hong Kong or alternatively charged on property situate in Hong Kong.
- Assets which passed up to 3 years prior to death by way of an inter-vivos gift are deemed to be part of the estate for estate duty purposes. However such gifts were exempt from estate duty if either:
- Their value was less than HKD26,000 or
- The gift was made in consideration of marriage or
- The gift was part of the deceased normal expenditure.
- The following were exempt from an estate duty assessment:
- The deceased's matrimonial home was not included in the computation where he left the same to a surviving spouse.
- The proceeds of any life insurance policy paid out in Hong Kong were considered a separate estate in themselves. Thus if the value of the life insurance payment was less than HKD962,000 no estate duty is payable on it irrespective of the value of the other assets comprising the estate.
- Assets which were located outside the territory of Hong Kong;
- Assets which were disposed of for a charitable purpose more than one year before death.
- Any property passing on death and held by the deceased as a trustee under a trust formed more than 3 years before death. Alternatively any property passing on the death of the deceased and held by the deceased under a trust not formed by the deceased.
- Property consisting of a pension, annuity, lump sum gratuity, or other similar benefit passing on the death member of a recognized occupational retirement scheme under the terms of that scheme.
Legislation that sought to abolish estate tax in Hong Kong was gazetted in May, 2005.
According to a government spokesman, the move was seen as vital in attracting and retaining foreign investment in Hong Kong, and was supported by the majority of respondents to a public consultation on the proposals, carried out in 2004.
"In recent years, global financial services have experienced phenomenal growth. The financial markets in the Asia-Pacific region have also quickened the pace of their development. Hong Kong is looking at unprecedented opportunities in this sector, but at the same time faces increasing competition," the spokesman observed, continuing:
"A number of countries in the region, including India, Malaysia, New Zealand and Australia, have abolished estate duty over the past 20 years. Hong Kong must not lose out in this race.
"The abolition will encourage people, including overseas investors, to hold assets in Hong Kong through a Hong Kong corporate vehicle or trust. Those who currently avoid the tax through overseas investments will also be encouraged to transfer their investments back to Hong Kong.
"The further development of the high value-added asset-management industry will foster growth in a number of professional services, and other industries will also benefit, bringing significant economic benefits to the community as a whole.
"Apart from attracting or retaining capital to promote the development of Hong Kong's financial services industry, the proposed abolition of estate duty will also reduce the time taken for obtaining the grant of probate or letters of administration, thereby helping to ease cash-flow problems heirs to an estate currently face, particularly for operators of small and medium enterprises."
It is estimated that the abolition of estate duty will cost the Government annual tax revenues of around $1.5 billion. However, the abolition of estate duty is expected to encourage investments in both financial assets and the property market in Hong Kong, thereby contributing additional revenue from stamp duty and other taxes.