102: British citizenship for Hong Kong Nationals: navigating the visa and tax rules
On Sunday 31 January 2021, over two million Hong Kong citizens were offered a pathway to British citizenship.
The announcement that such a route would be introduced was made in summer, following mainland China’s threat to introduce its ‘national security law’ into the territory, law that was introduced at the end of June. The new pathway is open to the 350,000 or so Hong Kong citizens who hold a British National Overseas passport, and the other two million or so who are entitled to hold one. These individuals are now able to apply for a two and a half year visa or five year UK visa which can be renewed indefinitely. After five years they can apply for indefinite leave to remain in the UK and a year after this they can apply for British citizenship.
Hong Kong citizens considering such a move will evidently have many considerations to weigh up, and one of these is likely to be the application of UK tax. Living in Hong Kong, they will be used to a very benign and territorial tax system. They may be aware that the UK’s tax system is much more complex and comprehensive, and may find the tax rates relatively daunting.
The good news for those considering relocating is that the UK needs to attract talent and investment from outside its boundaries, and is aware that the high tax regime may deter this. Consequently, it offers a relatively generous tax system to most foreign individuals for a number of years after they arrive. In order to make the most of this, individuals need to understand how it works and ideally need to plan properly well before they arrive. They will also need to understand how the immigration rules interact with the tax rules: generally the longer an individual is in the UK, the more they will be drawn into the tax regime applying to the majority of UK residents.
Take the example of 51-year-old ‘Franky’, a Hong Kong national who also holds a BNO passport. Franky is taking early retirement after a successful 30 year career in banking. He now owns his home in Hong Kong and has some financial investments in Hong Kong.
He has some friends and family in and around London, and looked into relocating to the UK on a ‘tier 1 investment visa’ but was put off when he learned he would need to invest £2 million in certain restricted UK assets. This would be a large part of his capital – he can’t afford to risk it in this way. Now, however, as a BNO passport holder, he is happy to find he has another, much easier, option.
Franky is aware of high tax rates in the UK, and knows UK residents are usually taxed on worldwide income. He wants to learn more about this. The first thing he will need to consider is when he becomes UK tax resident. The question is determined by various factors, including the ties an individual has to the UK, and the number of days they are resident. In some cases an individual becomes UK resident on the day they arrive, but it can be on the 6 April (the beginning of the UK’s tax year) before they arrive, or, in some cases on the 6 April after they arrive. He may find that he becomes UK tax resident earlier than he thinks he will.
The next thing that Franky will need to consider is how he will be taxed in the UK once he is a UK resident. An important factor in this is his domicile. Domicile is quite different from residence and is a subject of its own – however it is likely that Franky’s domicile is Hong Kong.
Franky is delighted to learn that as a non-UK domiciliary he does not in fact pay tax on his worldwide income – at least not for several years. He is entitled instead to the ‘remittance basis’ of taxation. This means he pays UK income tax and capital gains tax only on his UK source income and gains, and on foreign income and gains brought (remitted) to the UK. By setting up his bank accounts carefully prior to becoming UK tax resident, he can provide much of his funding in the UK by bringing funds over from a ‘clean capital’ account, containing only funds which arose prior to his UK residence status, and not pay UK tax on this.
He decides not to sell his flat in Hong Kong, as he is not sure how he will find living in the UK, and would like to retain the option to return. Instead he rents it out. He pays Hong Kong tax on the rental income (at 15%) though the income from his financial investments is generally not taxed in Hong Kong. For now, though, he is on the remittance basis, and is not required to pay UK tax on this income, unless he brings it to the UK.
Franky settles in the UK and decides he wishes to stay long-term. He understands he will be granted ‘indefinite leave to remain’ in the UK after five years.
His tax adviser informs him that once he has been UK resident for seven out of the previous nine tax years he will have to pay the ‘remittance basis charge’ (initially £30,000 per year) to be able to use the remittance basis. If he ceases to be UK resident prior to spending five years in the UK, though, the five year period required for indefinite leave to remain will start from scratch on his return. If instead he leaves the UK after five years, he will be permitted up to two years outside the UK before losing his right to remain, but will be subject to the remittance basis charge within two years of returning.
Franky considers whether he might leave the UK anyway – after all, as a BNO passport holder he can always come back. But, he wonders, what if the rules change while he is away? He has also recently begun dating an English woman, Kathy, and the prospect of a long-distance relationship does not appeal. He takes some more advice on how to mitigate his overall tax burden, finds the additional tax is not quite as much as he feared, and decides to stay in the UK. He acquires indefinite leave to remain.
After six years Franky can apply for citizenship. By this time, he has broken up with Kathy, Hong Kong seems more appealing again and he thinks perhaps he can break his UK residence after his passport comes through, just in time to avoid the seven year deadline for the remittance basis charge. But, to apply for a British passport, he has to declare that he intends to make his main home in the UK. So Franky stays.
Some years later, Franky faces the approaching problem that, once he has been tax resident for 15 of the previous 20 tax years, he will become deemed domiciled for all tax purposes and taxed on the same basis as most individuals resident here. He will be liable to income tax on his worldwide income (though Hong Kong tax paid would be credited under the Hong Kong / UK double tax treaty), he will pay capital gains tax on worldwide gains, and, if he dies, inheritance tax will be payable on his worldwide assets.
Of course matters are, in reality, more complex. Franky might acquire an actual domicile of choice in the UK (by virtue of moving to the UK and intending to remain here). Advice on all this, together with immigration advice, needs to be taken in good time – ideally well before the end of the tax year prior to moving – to allow sufficient time for implementation.
With thanks to Alfred Ip, of Hugill & Ip, Hong Kong.