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SCMP Reporter

HONG KONG residents considering joining the latest emigration exodus should look at ways of minimising their potential tax bills before settling into new domiciles.

   The most popular destinations - Canada, Australia, the United States and Britain - offer not only a new home, but also up to three times the income tax rate, as well as capital gains and inheritance taxes.

   Local officials said improving economic conditions overseas, combined with worries about the political situation in Hong Kong after 1997, have caused emigration applications to rise sharply for the first time since the peak of the brain drain in the early 1990s.

   There are attractive ways of protecting your wealth before leaving Hong Kong. The most common and effective way is to set up an offshore trust to hold cash, stocks, bonds and property.

   However, revenue-hungry governments around the world are increasingly restricting the benefits that can be claimed. Trusts are best suited for those with assets of at least HK$500,000.

   They will generally cost between US$8,000 and US$10,000 to set up, with annual charges of about US$4,000 to US$6,000.

   A trust is a legal arrangement that separates the legal from the beneficial owner.

   They are widely used for personal finance planning, particularly to mitigate tax bills for probate.

   With a trust, the person with the assets, or the settlor, transfers them to a trustee until they are to be distributed to beneficiaries.

   Barry Macdonald, a partner with Coopers & Lybrand, said: 'The trustees powers can be restricted. While they have discretion as to what they can do with the assets, they always have to act in the best interests of the beneficiary.'    An offshore trust is administered under the laws of an offshore jurisdiction, typically the Channel Islands, Bermuda and the Cayman Islands.

   This usually protects the assets from liability for income tax, capital gains tax, inheritance tax or exchange controls.

    Canada, the most popular destination for Hong Kong emigres, has the most generous tax concessions. It is possible to have a five-year Canadian tax holiday on income and capital generated in an offshore trust.

   This could save an investor with annual income of HK$1 million, up to HK$540,000 a year in Canadian income tax.

   But those emigrating will face tough new tax disclosure rules designed to identify taxation cheats.

    This will involve producing financial statements revealing the origin and destination of assets.

    Those heading to the United States will be given a less generous reception by their new hosts.

   Mr Macdonald said: 'Trusts are possible but only in limited situations.'    In addition, sweeping changes to American tax laws could result in big tax bills for Hong Kong residents who have set up trusts for the benefit of American citizens or residents.

   Strict new reporting requirements will also be introduced to enable the US Internal Revenue Service to enforce the code. Prospective US citizens should remember to receive all their employment income; bonuses and other lump sums, before become a resident.

   'They could be subject to US tax if they are received after the individual has taken up residence. If you become a US resident, you are exposed to capital gains tax on your worldwide assets, including gains arising before taking up residency.'    The use of offshore trusts in Britain can be used to mitigate capital gains tax and inheritance tax liability.

   A non-British domiciled individual, who places capital assets offshore into an offshore trust, can then remit them to British citizens, provided the settlor is not domiciled in Britain at the time of distribution.

  Establishing a trust before settling in Britain can also make it easier to effectively plan ways of limiting inheritance tax on non-British assets, even after the settlor takes up residence.

   But it is bad news for those considering relocating to Australia as tax authorities have effectively eliminated off-shore tax havens. Mr Macdonald said: 'An emigrant to Australia cannot place his or her foreign assets into a foreign trust in order to avoid or defer Australian tax arising after residency on these assets.' 



Emigrants face hidden dangers