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A Tax Guide for Hong Kong Residents Moving to the UK

It is imperative that Hong Kongers seeking to relocate or invest in the UK ensure that they have a clear understanding of the UK tax system and seek pre-arrival tax planning advice. Income tax rates are generally much higher in the UK than in Hong Kong, and the UK also levies tax on capital gains and inheritance.

However, depending on eligibility, the UK permits non-UK individuals to benefit from a favourable tax regime while resident in the UK.

The UK’s tax system for individuals hinges on two crucial concepts: residence and domicile. These factors determine an individual’s liability to UK taxes, and they are distinct from immigration status.

Residence

An individual’s UK tax residency status is determined by the UK’s Statutory Residence Test, taking into account factors such as:

• The number of days spent in the UK
• Ownership of a home in the UK
• Employment inside or outside the UK
• Presence of UK-resident close family members
• Previous days spent in the UK in prior tax years

Non-resident individuals generally face limited UK tax liability, primarily related to UK-source income, such as earnings from UK properties, as well as capital gains on specific categories of assets.

Becoming a UK tax resident significantly expands this tax exposure to a global level; it is, therefore, crucial to plan carefully and far in advance to avoid inadvertently becoming a UK tax resident or becoming a UK tax resident having already put in place measures for UK tax optimisation for your global assets.

Domicile

Domicile, an English common law concept, centres on the place of an individual’s permanent home. A status generally inherited from one’s father at birth, domicile may change if a person relocates to a new jurisdiction with the intention to reside permanently/indefinitely. UK tax rules also deem individuals domiciled in the UK under specific circumstances, notably for long-term residents.

Domicile plays a vital role in UK taxation because:

• Non-UK domiciled individuals who are resident in the UK can claim the remittance basis of taxation for non-UK income and capital gains and
• Non-UK domiciled individuals are subject to inheritance tax only on UK-situated assets and certain offshore assets linked to UK residential property.

With longer-term residents of the UK, there is merit in building up evidence that they have not acquired a domicile of choice in the UK. Nevertheless, the UK tax authorities (His Majesty’s Revenue and Customs) may challenge domicile claims.

As Hong Kongers who relocate to the UK under the BNO visa program do so with the intention to settle in the UK indefinitely, their worldwide income and gains could be brought into the scope of UK taxation, including UK inheritance tax, highlighting the need for such individuals to obtain advice as soon as possible before they intend to come to the UK or shortly after.

Pre-Arrival Planning

Pre-arrival planning aims to arrange assets tax-efficiently in relation to their UK residence, including:

• Segregating accounts and creating a pool of funds for UK use without tax consequences, known as ‘clean capital’;
• Reviewing investments, trusts, and company holdings from a UK tax perspective; and
• Considering the tax benefits of the remittance basis of taxation for the first 15 tax years of UK residence.

The Remittance Basis

By default, UK residents are taxed on worldwide income and capital gains, known as the ‘arising basis’. However, UK resident non-UK domiciled individuals can elect to be taxed on the ‘remittance basis’. This means that such individuals are taxed on UK source income and gains as they arise, but non-UK source income and gains remain untaxed, unless remitted or brought back to the UK.

Under current rules, the remittance basis can be claimed for no charge during the first seven out of nine years of UK residence, making the UK an attractive destination in comparison to other jurisdictions. After this time, a charge applies, starting at £30,000 and increasing to £60,000. The remittance basis cannot be claimed after 15 out of 20 years of residence.

Property

For most individuals moving to the UK, purchasing a family home is a significant investment. Tax implications, as well as funding methods, should be carefully considered. Stamp duty land tax (SDLT) applies to property purchases in England and Northern Ireland, with higher rates for non-UK residents and additional rates applying for those who already own property worldwide. Seeking advice is crucial to navigating SDLT and other potential taxes related to property acquisition.

Conclusion

Relocating to the UK is a monumental decision with potentially far-reaching tax implications. The UK’s favourable tax regime, especially for non-UK domiciled individuals, presents a wealth of opportunities.

However, to ensure the most favourable tax outcomes, it is essential to seek expert advice and plan strategically, both before and after arriving in the UK. Whether you are considering the BNO visa route or other immigration options, understanding and optimising your tax position can significantly enhance your financial prospects in the UK.

To discuss any of the points raised in this article, please contact Ben Rosen or fill out the form below.

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A Guide to Restrictive Covenants

Restrictive covenants are legal obligations imposed in contracts or deeds that limit the use of land or property in various ways. These covenants can affect a property’s use, and the rights of the parties involved. In addition, as they are registered on the title, and can therefore run indefinitely, they can also lead to some rather outdated and nonsensical scenarios, particularly in relation to older properties.

Matters which would have seemed completely innocuous over a hundred years ago could cause problems now. For newer properties, restrictive covenants can be designed to uphold a particular standard across a development for all residents and property owners.

What Is A Restrictive Covenant?

A restrictive covenant places certain limitations or restrictions on the use, development, or activities related to a piece of land or property. They are used to protect the interests of other property owners and/or developers.

One significant milestone in the development of restrictive covenants was the case of Tulk v. Moxhay 41 E.R. 1143 (22 December 1848). It is a landmark decision, not just in law but in the history of London, because if the Court had ruled differently, Leicester Square as we know it would not exist. Happily, (for movie premier lovers at least!) the Court recognised the enforceability of covenants that ran with the land.

The case established the principle that subsequent owners of land could be bound by restrictive covenants made by their predecessors, provided certain conditions were met.

What Makes A Restrictive Covenant Enforceable?

The following must be present for a restrictive covenant to be enforceable:

• The original parties involved must have intended the covenant to be binding and enforceable. This intention should be clear from the language used in the contract or deed.
• The covenant must relate to the land in question and significantly affect its use, value, or enjoyment.
• There must be privity of estate between the parties, which means that the covenant must “run with the land.” This ensures that subsequent owners are bound by the covenant.
• For a subsequent owner to be bound by a restrictive covenant, they must have had notice of the covenant’s existence. Notice can be actual, constructive, or imputed.
• Courts may refuse to enforce a restrictive covenant if it is found to be unreasonable or against public policy.

How Are Restrictive Covenants Applied To New Build Properties?

Restrictive covenants in new build developments often aim to maintain the aesthetics and uniformity of the development. They may include provisions that restrict property owners from making significant changes to the exterior of their homes, such as altering the facade, installing non-approved fencing, or painting the property in a way that deviates from a specified colour palette.

Property uses which are sometimes restricted in new build developments include activities such as running a business from the premises, converting the property into a multi-unit dwelling without permission, or using it for industry.

In addition, some covenants may require property owners to maintain their homes and gardens to a certain standard. This can include keeping gardens in good condition, repairing damage promptly, and maintaining the property’s overall cleanliness. Restrictions may also be placed on the construction of outbuildings, such as sheds or garages, to ensure they do not negatively impact neighbouring properties or the overall aesthetics of the development.

Will A Restrictive Covenant Affect My Sale?

When it comes to new build developments, it can be seen that restrictive covenants can be beneficial. The prohibition from changing the outside of the property, for example, ensures that an attractive environment together with uniformity is achieved whilst properties are being bought and sold.

More commonly in older properties, where the covenant is often decades old, if the covenant is considered onerous or has been breached inadvertently remedies are available.

• Indemnity Insurance: If the beneficiary of the covenant cannot be identified, obtaining indemnity insurance can provide protection for both the current owner and future buyers against potential enforcement of the covenant. This insurance covers the costs associated with dealing with the covenant.
• Negotiating a Release or Variation: If the beneficiary of the covenant is known, negotiations can be initiated to secure a release or variation of the covenant. This involves altering the covenant’s terms or removing it entirely.
• Lands Tribunal Challenge: If you believe that the restrictive covenant no longer serves a practical purpose and meets the criteria outlined in section 84 of the Law of Property Act 1925, you have the option to challenge it through the Lands Tribunal. If successful, this process can lead to the removal or modification of the covenant, simplifying the property’s sale.

During the sale process, it is crucial to collaborate closely with a solicitor well-versed in property law who can provide expert guidance, whether it involves obtaining indemnity insurance, negotiating with the beneficiary, or pursuing legal action in the Lands Tribunal to remove or modify the covenant.

How Are Restrictive Covenants Enforced?

In recent years, the Courts have been inclined to take a more flexible approach to restrictive covenants, particularly when considering their reasonableness. The test of reasonableness often involves weighing the competing interests of the parties involved, balancing the benefit gained by the party seeking enforcement against the detriment suffered by the party in breach. Overly, restrictive covenants can hinder economic development and impede progress. Consequently, the Courts may refuse to enforce covenants that are deemed unreasonable or contrary to public policy.

The ancient law of restrictive covenants must strike a balance between protecting property rights and facilitating development and progress. Developers and property owners should take expert legal advice from a Residential Property Law Solicitor if they have any concerns regarding implementing or breaching restrictive covenants.

To discuss any of the points raised in this article, please contact Meera Malde or fill in the form below.

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Looking at the King’s Speech 2023 from a Property Perspective

This week’s King’s Speech has seen the UK government outline its legislative agenda for the forthcoming year-long session of Parliament. This is primarily focused on three priorities – economic growth, societal strengthening, and public safety.

In this article, we focus on the government’s proposals that may impact on the property sector. 

The Renters (Reform) Bill

The government remains committed to re-shaping the landlord/tenant relationship, although in an attempt to balance the landlords’ interest, the proposed abolition of the Section 21 Notice eviction procedure will be delayed until after the court system has been reformed. This will almost certainly take years to complete, effectively shelving the proposals for the foreseeable future.

The King’s Speech expressly recognises the need to also protect landlords, ensuring they benefit from reforms to enable them to regain possession of their properties when needed.

Minimum Energy Efficiency Standards

As already announced by the Prime Minister in September, the briefing notes to the King’s Speech confirm that the government will not take forward proposals to force private landlords to urgently undertake home improvements to meet a minimum Energy Performance Certificate rating of ‘C’ (having previously required this to be completed by 2025 for new tenancies and 2028 for existing tenancies).

The Leasehold and Freehold Reform Bill

The King’s Speech stated that the government will introduce a bill to i) make it cheaper and easier for leaseholders to purchase their freehold; and ii) tackle the exploitation of millions of homeowners through punitive service charges. These proposals build on those introduced by the Leasehold Reform (Ground Rents) Act 2022.

Consistent with the government’s previous communications, the main proposals are summarised below:

Ground rents and lease extensions

1. Caps to be introduced on ground rents in existing leases;
2. Lease extension procedure to be overhauled, making it more straightforward and cost-effective;
3. Lease extension term to increase from 90 years to 990 years; and
4. Removal of the current two-year ownership requirement before a leaseholder can request a lease extension.

Leaseholds

1. Save for exceptional circumstances, a blanket ban on the creation of leasehold houses;
2. Caps on certain landlord and managing agent fees when a leasehold property is sold;
3. Increased transparency in respect of service charges; and
4. Further empowerment of leaseholders to challenge freeholders over unfair practices.

Conclusion

Whilst the proposed legislative reforms promise much, it remains to be seen what can be achieved by the current government given a general election is scheduled to be held by no later than 28 January 2025.

To discuss any of the points raised in this article, please contact Daniel Blake or fill in the form below.

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