Earlier this week, Wedlake Bell and Hugill & Ip hosted an event in Hong Kong, focusing on the upcoming abolition of the non-domicile tax regime in the UK, the residency-based system proposed in its place and the future taxation of offshore trusts.

Matthew Braithwaite, Partner and Head of Offshore Wedlake Bell and Alfred Ip, Partner of Hugill & Ip, provided a comprehensive overview of the reforms, their implications for wealth holders and their families, and the evolving landscape for international investors considering the UK as a destination.

The discussion highlighted several key topics:

Matthew Braithwaite remarked, “These reforms mark a significant shift in the UK’s approach to taxation, particularly for international investors. Understanding these changes and planning accordingly is crucial for effective wealth management.”

Alfred Ip added, “As the UK positions itself in the global market, it’s vital for individuals and families to reassess their tax strategies in light of these new regulations – especially considering the strong links between Hong Kong and the UK. Such changes will impact both jurisdictions, the general trust regime and Hong Kong which is increasingly attracting Family Offices from overseas.”

At the end of the presentation, they went through some practical considerations and case studies. The event concluded with a Q&A session with the audience.

The event attracted a diverse audience of financial professionals, wealth managers, and individuals interested in understanding the implications of these significant tax reforms.

Implications for the Non-Domicile Tax Regime

The UK’s budget announcement on 30 October 2024 has introduced pivotal changes that will significantly affect the non-domicile tax regime. These reforms are especially relevant for wealth holders, their families, and the future of the UK as a destination for international investors.

The budget reform signifies a transformative shift in the UK’s non-domicile tax regime, with far-reaching implications for wealth holders and their families, particularly those wishing to mitigate their tax exposure. Understanding these changes is essential for effective tax planning and maintaining the UK’s status as an attractive destination for international investors. By taking proactive steps, individuals can navigate the new regulatory environment and safeguard their financial interests.

Impact on Offshore Trusts

The proposed changes will enhance the tax obligations for offshore trusts established by non-domiciled individuals. If a settlor has been resident in the UK for at least four years, their offshore trust will be subject to UK taxation on worldwide income and gains. This marks a shift from previous treatments where such trusts were protected from UK tax on an arising basis (tax instead being charged on distribution to UK resident beneficiaries).

Moreover, the new reporting requirements necessitate comprehensive disclosures regarding trust income and distributions. This heightened scrutiny could lead to increased compliance costs for trustees and necessitate more sophisticated financial management strategies.

Consequences for existing residents

For individuals already residing in the UK during the past 10 years, the budget necessitates a critical reassessment of their tax status.  This change could significantly alter their financial planning and estate management strategies. If they consider relocation, they should act fast to explore their options.

The implications of the UK’s reform to the non-domicile tax regime are particularly significant for Hong Kong residents who have already relocated to the UK. Many individuals from Hong Kong have previously benefited from non-domicile status, allowing them to minimize their UK tax liabilities on foreign income and gains at least for their first seven years of UK tax residence. However, with the new rules, existing residents may face increased tax obligations on the foreign income and gains sooner than expected. This change necessitates a thorough re-evaluation of their financial planning strategies, including investment structures and potential tax liabilities associated with their global wealth.

Existing residents should consider potentially restructuring their investments or revising their estate plans to accommodate the new rules. The implications of becoming deemed domiciled extend beyond immediate tax liabilities, affecting long-term financial strategies and wealth transfer.

Implications for new residents

For those considering relocating to the UK to may be attracted by the four-year tax-free period on foreign income and gains but will need to be mindful of their UK tax position if their intention is to obtain a British passport.  Under the new rules, after a period of ten years they will be subject to IHT on their worldwide assets, whereas before they may have considered settling their assets outside of the UK into a trust to minimise their IHT exposure, such trusts are to be brought fully into the scope of IHT, necessitating consideration of other estate planning options.

Strategic considerations before the April 2025 deadline

As the April deadline approaches, wealth holders and their advisors must take immediate action. Engaging with professionals who specializes estate planning for international wealth holders will be critical for navigating the complexities of the new regime. A thorough review of existing trust structures and investment portfolios is essential to ensure compliance and minimize tax exposure.

Additionally, staying informed about developments from HM Revenue and Customs (HMRC) will be crucial as the government consults and finalises the implementation of the budget changes. By preparing now, individuals can better position themselves to adapt to the evolving tax landscape in the UK.

Eventual impact on Hong Kong Family Offices

The reforms may catalyse a potential outflow of family wealth from the UK to Hong Kong, particularly as the Hong Kong Special Administrative Region (HKSAR) government has been actively promoting the establishment of family offices. With attractive tax incentives and a favourable regulatory framework for family offices, Hong Kong presents a compelling alternative for high-net-worth families seeking to preserve and manage their wealth.

The combination of robust financial infrastructure, potential tax benefits, and a business-friendly environment may encourage families to relocate their wealth management operations back to Hong Kong. This trend could be further amplified as families reassess their long-term financial strategies in light of the UK’s tightening tax regime, leading to a significant relocation of assets and family wealth to Hong Kong.

More about Wedlake Bell Offshore Private Client Services

The Wedlake Bell Private Client Group includes specialists in tax and estate planning, residential property, matrimonial and family law, art and luxury assets, and dispute resolution. They advise UK based private clients and those based overseas who require English law advice. With support from experts in related practice areas, such as immigration, property, corporate and disputes, the team are able to provide a seamless service that encompasses every issue a private client, and particularly the foreign investor, is likely to face; be it tax efficient investment, asset purchase and registration, or coordinating global estate planning and asset protection structures across multiple jurisdictions.

For those coming to the UK, Wedlake Bell can assist with pre-arrival planning from a UK tax and succession planning perspective. For those looking to leave the UK, they can help with relocation planning to review UK tax affairs, global asset structures and succession plans. Such advice incorporates the major changes to the taxation of non-UK domiciled individuals that the UK government proposes to introduce from April 2025.

All advice is tailored to meet the client's specific requirements and dovetail with any local advice provided by advisors in their home jurisdiction.

More about Hugill & Ip Cross-border Asset Management and Estate Planning

Internationalisation of both Asian and non-Asian clients and a cross-jurisdictional spread of family assets means much more complex succession and tax issues. Hugill & Ip take a broad and independent view and are better placed to understand the structure well before the investment strategy. Large returns on assets are immaterial if swallowed up by unforeseen taxes, legal liabilities or inadequate succession planning.

The focus of estate planning nowadays has shifted to the efficiency of cross-border asset management, and to alleviate the pain and trouble of the often-cumbersome bureaucratic process, which in most cases will be dealt with by the most beloved one simultaneously with the grief of the loss. Estate planning is accordingly quintessential to a complete autonomous future.

Hugill & Ip assist clients of diversity to achieve their objectives by assessing their needs and concerns and providing practical legal solutions to meet the above objectives. They provide professional advice on estate planning for singles or for married couples, as well as for expats in Hong Kong or for individuals who hold assets in a foreign jurisdiction (including pre-migration planning).