UK and Hong Kong Tax Treaty

Simon Misiewicz

Expat & Property Tax Specialist

23rd September 2021

What are the basics of the UK and Hong Kong Tax Treaty?

As British / Hong Kong accountants serving thousands of UK landlords that purchase buy to let properties, we know that the UK and Hong Kong Tax Treaty basics can seem like a daunting topic to understand.

To understand the importance of the UK and Hong Kong Tax Treaty, it is worth knowing the history of the relationship.

Hong Kong was a British colony from 1841-1941 and again from 1945-97 when sovereignty was handed over to China.

The UK 2001 Census recorded 96,445 Hong Kongers residing in the UK, while the Office for National Statistics estimated that the Hong Kong-born resident population was 78,000 in 2009.

These figures do not include people born elsewhere who emigrated to the UK from Hong Kong and were raised here. It also does not have descendants of Hong Kongers born within the UK.

UK policy towards Hong Kong is massively influenced by its considerable commercial interests.

The first Double TaxationAgreement (DTA) between Hong Kong and the UK came into effect in 2011.

This Agreement covered all taxes imposed on total income or elements of income.

An updated DTA entered into force in the UK on April 2011 and can be reviewed in full here.

Contact one of our UK/Hong Kong advisors today if you are moving to the UK from Hong Kong and are unsure of your financial position.

UK Tax Residency | International currency Exchange | Landlords & Property Investors | HMRC UK Remittance Basis Tax Charges for international transfers

Do I have to pay income tax in the UK and Hong Kong? 

The UK system for individuals is based on two concepts: residence and domicile.

They determine the extent of an individual’s liability to pay tax in the UK.

Whether an individual is a UK resident is determined under the Statutory Residence Test (SRT).

A person is a resident under the SRT for a specific year in the UK. The fiscal year runs from 6th April to 5th April) based on the following factors:

– the number of days the person is present in the UK
– whether the person has a home in the UK
– whether the person works in or outside the UK
– whether the person has UK-resident family members
– the number of days the person has been present in the UK in previous years

Non-resident individuals have minimal liability to UK tax, other than UK-sourced income and income from UK property.

Will Hong Kongers have increased tax if you become a UK Resident? 

A Hong Konger becoming a UK resident will increase their UK tax liability significantly.

It is also possible to inadvertently become a UK resident. Care is needed to avoid this.

A Hong Konger moving to the UK will often be a gradual process involving several trips to view properties, co-ordinate schools and similar activities.

Over the course of a UK fiscal year, these trips could add up to class the person as a UK resident.

Hong Kongers who spend a significant amount of time in the UK should take advice on their UK residence status.

When a person becomes a UK resident, reporting requirements to HMRC can apply. Reporting obligations for non-residents are limited.

The default position for a UK resident individual is that they are liable to pay Income and Capital Gains Tax on their worldwide income and capital gains.

Unlike in Hong Kong, this also includes investment income and gains.

Hong Kongers who are UK residents but non-UK domiciled can benefit from a regime that significantly limits their exposure to these taxes.

UK Tax Residency | International currency Exchange | Landlords & Property Investors | HMRC UK Remittance Basis Tax Charges for international transfers

Is being domiciled a good strategy for the UK?

Domicile is a common law concept based on where an individual has a permanent home.

An individual inherits their domicile from their father at birth, but a new domicile can displace this if the individual moves to a new jurisdiction to remain there indefinitely.

Individuals may be deemed domiciled in the UK for tax purposes where they are classed as a ‘long stayer’.

Domicile is important because:

– a non-UK domiciled individual may claim the Remittance Basis of taxation in relation to their non-UK income and capital gains
– an individual who is non-UK domiciled is only liable to pay IHT on their UK-based assets and certain assets that derive their value from UK residential property

A Hong Konger would have a strong argument for claiming that they are non-UK domiciled if it is clear they are living in the UK temporarily and have a specific time in the future when they will leave.

There is always the risk of a domicile challenge by HMRC.

If you are unsure of your financial position in the UK but consider moving from Hong Kong, speak to one of our UK and Hong Kong advisors today.

What is the Remittance Basis?

Resident but non-UK domiciled individuals may elect to be taxed on the Remittance Basis.

This means they are taxed when resident in the UK on their UK-sourced income and gains as they arise.

Non-UK income and gains arising in a year of residence are not subject to UK tax unless the income or gains are remitted to the UK.

The remittance basis gives a UK resident, non-UK domiciled Hong Konger the ability to shelter non-UK income and gains entirely from UK tax.

Remittance is defined as the income or gains being brought or used in the UK by the person/entity connected to them. Examples of this would include:

– transferring non-UK income and gains from an overseas investment portfolio to a UK bank account
– paying a foreign credit card that has been used in the UK with non-UK income or gains
– gaining a UK residential property using non-UK income or gains
– servicing an overseas mortgage for a UK residential property using non-UK income or gains

UK / Hong Kong advice should be taken on the above to maximise the benefits of the Remittance Basis.

UK Tax Residency | International currency Exchange | Landlords & Property Investors | HMRC UK Remittance Basis Tax Charges for international transfers

Can Hong Kongers claim the Remittance Basis?

The ability for Hong Kongers to claim the Remittance Basis and the limited exposure to IHT for the first 15 years of UK residence means it can be an attractive place to live.

For a Hong Kong native moving to the UK, the most significant investment is likely to be purchasing a family home.

It is essential to consider the implications and the method of funding the purchase to ensure a tax-efficient strategy is in place.

With regard to UK issues, Stamp Duty Land Tax (SDLT) is payable on the purchase of land and property in England and Northern Ireland.

Higher SDLT rates apply to the purchase of UK residential property by non-UK residents, and where the purchaser owns other residential property elsewhere in the world. Reliefs are available.

The acquisition of a significant asset in the UK also raises the prospect of IHT on the owner’s death or the property’s gift in the owner’s lifetime. Capital Gains would be liable on a sale or other disposal of the property.

We recommend speaking to a UK property accountant before making a property purchase here.

What taxes do Hong Kongers have to pay in the UK? 

Income from UK employment derived by a Hong Kong resident will be exempt from tax in the UK, as long as the recipient is present in the UK for no longer than 183 days in any 12 months, the remuneration is paid by a non-UK employer, and that the remuneration is taxable in Hong Kong.

The UK and Hong Kong Treaty ensure that Hong Kongers do not pay tax twice on the same income.

A Double Tax Agreement (DTA) over-rides the domestic law in both the UK and Hong Kong.

If you are a non-resident in the UK and you gain UK bank interest, this income would be taxable as UK-sourced income under domestic law.

If you were resident in Hong Kong, the UK and Hong Kong Treaty, DTA would mean that the interest would only be taxable in Hong Kong.

HMRC would not be able to tax that income.

A Hong Konger in this situation would claim to HMRC on a Self-Assessment tax return to exempt the income from UK tax.

To discuss other ways of paying less tax in the UK, contact our team of UK / Hong Kong accountants today.

UK Tax Residency | International currency Exchange | Landlords & Property Investors | HMRC UK Remittance Basis Tax Charges for international transfers

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