In its recent budget, the Hong Kong government announced proposals for the abolition of estate duty....
In its recent budget, the Hong Kong government announced proposals for the abolition of estate duty. In light of this, is there any need to use trusts for estate planning?
Earlier last year, the government issued a consultative document that invited comments from interested parties on future options for estate duty. The document listed several options for its future shape - for example, one proposal was to move to a basis of tax on an individual's worldwide estate based on their domicile. Thankfully, this option has been rejected in favour of the rather radical option of abolition. The government hopes to have legislation abolishing the tax by the end of the summer.
Estate duty in Hong Kong is levied at a maximum rate of 15%, and only on Hong Kong assets. This system virtually encouraged individuals to hold assets outside the territory where possible. In relation to immovable property, such as real estate, there were many schemes used that effectively changed the nature of the property to make it non-Hong Kong situs.
One way to turn Hong Kong property into non-Hong Kong property would be to hold it through an offshore company. Instead of passing on the property on death, the deceased would pass on the shares in the non-Hong Kong company. Due to anti-avoidance provisions that looked through offshore companies that were controlled by Hong Kong residents, it was usual to hold the company shares in an offshore discretionary trust.
If run properly, the trustees would be the shareholders and controllers of the company, so no control in Hong Kong could be apportioned, therefore avoiding estate duty. So, with estate duty confined to history, will trusts go the same way?
Certainly, the abolition of estate duty does create less incentive to create trusts where the motivation may have been driven primarily by tax planning. However, there are still many good reasons to create a trust if you are resident in Hong Kong.
The main reason will be for estate planning. Consider what happens to an individual's estate if he or she dies without making a will. This is known as dying intestate, and Hong Kong has law that governs what happens to your estate if you die intestate. Basically, the property will be divided out among certain individuals, who may not necessarily be the ones you wanted to benefit. The table below summarises the rules.
These rules can have quite undesirable effects for many people. For example, a client's father left the family when he was a child and has not seen him since, having had no part in his upbringing. He is married with no children. If the client dies with a total net worth of, say, $10m, his wife will receive the personal effects, plus $1m, plus 50% of the residue, giving her a total entitlement of $5.5m. The other $4.5m will be split equally between the client's mother and father, assuming they are both alive. If the mother is deceased, the father would inherit the whole $4.5m. This is something that clients should be concerned about, but most are probably blissfully unaware of it.
To guard against this happening, the client could make a will. Under Hong Kong law, individuals are totally free to dispose of their whole estate to whoever they wish, so the client could leave all his wealth to his spouse. However, if the assets are held in his name, Hong Kong probate, and foreign probate if non-Hong Kong assets are held, will need to be granted before the estate can pass to his heirs. This process takes on average 18 months to 2 years. This is a long time to wait, especially if bills need to be met, and can enhance the grief of losing a loved one. A trust will still be of use in such a situation.
Clarke replacing Balkham
'Deep-dive analysis of client behaviour'
Ways to mitigate April’s increases
The best equity income funds examined