Rule changes are taxing issue for expatriates
There have been several important tax changes in Britain and the United States that are expected to affect expatriates in Hong Kong, and others with family trusts.
In the US, the biggest single change affecting many holders of offshore trusts is that they will have to withhold 30 per cent tax on certain distributions to beneficiaries who left the US on or after June 17, 2008.
This means that if trustees want to make a distribution to a beneficiary, they should consider whether the person is a US expatriate affected by this new rule and, if so, they may be forced to withhold tax due in the US.
In Britain, the government has changed the tax rule that relates to trusts, removing some benefits.
According to Nisha Chadha, a lawyer with international law firm Withers in Hong Kong, the government has restructured the tax regime so that it is now more tax-efficient to gift assets to children directly after they reach the age of 18 than through trusts.
'Most people would think this isn't an appropriate age to be receiving high levels of wealth,' she said.
'From a tax perspective, it might be beneficial, but we are finding that people would rather take the tax hit than be in a situation where their children have to deal with the responsibility that comes with having significant wealth.'
For expatriates in Hong Kong, a second point to note in the British tax regime regarding trusts is the regulations regarding domicile status.
Unless a person, who was originally domiciled in Britain, can demonstrate that they have acquired residency in Hong Kong, they will be taxed for any inheritance.
According to Ms Chadha, to acquire a domicile of choice, a person needs to move to a country with the intention of residing there permanently or indefinitely.
'There are several factors to be weighed ... in determining where a person is domiciled. The significance of doing that analysis is that if a person is domiciled in [Britain] and sets up a trust, subject to a relatively small nil-rate band of currently #312,000 [HK$4.13 million], establishing that trust is subject to an immediate inheritance tax of 20 per cent,' she said.
Before March 21, 2006, some forms of trust could be set up without it being taxed, but all new trusts set up since then are subject to this charge unless the person is not domiciled in Britain when the trust is made and the assets are situated outside the country.
Also subject to this change are existing trusts to which any new assets or additions are made.
In addition, rules relating to the taxation of individuals who are British citizens but not domiciled in Britain changed from April 5 this year.
Three significant changes concern trust distributions, remittances to Britain and British homes owned through companies (with or without trusts).
Before April 5, money could be remitted to Britain from an offshore trust to a non-domiciled British resident beneficiary tax free. Following changes to the tax rules, these beneficiaries will be taxed. For a trustee wishing to benefit, non-domiciled British residents might need to maintain segregated accounts and be able to identify which assets comprised income, capital and capital gains so that assets that could be enjoyed in a more tax-efficient way could be easily identified, Ms Chadha said.
Also, when a non-domiciled British resident has an offshore mortgage for a property in Britain, it was previously the case that the mortgage could be financed from offshore funds and that would not be treated as a remittance. That is now treated as a taxable remittance for new mortgages.
Following the recent changes, there are also additional tax implications for those owning homes in Britain via an offshore holding company.
The capital gains of the company may be attributed to British resident shareholders.
Where the company is held in an offshore trust, the combined effect of the new rules is that the gains of the company may be attributed to the trustee, potentially leading to a tax charge on a British resident beneficiary who lives in a British home, even if they are domiciled outside the country.
'These are significant changes and people who are setting up trust structures for the benefit of people who are [British] residents or who have implemented remittance planning should take tax advice,' Ms Chadha said.