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Jun 18, 2012

Inheritance tax and law


Inheritance tax or estate duty has been abolished since 11 February 2006. So the dependents of a person who died on or after 11 February 2006 are not subject to inheritance tax or estate duty.

INHERITANCE TAX

How high are inheritance taxes in Hong Kong?

Inheritance tax or estate duty has been abolished since 11 February 2006. So the dependents of a person who died on or after 11 February 2006 are not subject to inheritance tax or estate duty. 


INHERITANCE LAW

What inheritance laws apply in Hong Kong?

The following is a general statement of the law as it applies in Hong Kong at the date of writing, but should not be relied upon as legal advice, and professional advice should always be taken in individual circumstances.

Devolution of immovable property is governed by Hong Kong law

The following are the principal laws governing estates:

  • Probate and Administration Ordinance (Cap. 10)
  • Wills Ordinance (Cap. 30)
  • Intestates’ Estates Ordinance (Cap. 73)
  • Inheritance (Provision for Family and Dependents) Ordinance (Cap. 219)

When it comes to ownership of property, Hong Kong law does not differentiate between residents and non-residents, or between nationalities, sexes or religions. Similarly in terms of inheritance, there is no restriction on the persons to whom property may devolve on death, provided they are 18 or over.

Where there is a valid will, the estate will be dealt with according to that will. In the case of intestacy, Hong Kong law will apply to immovable property situated in Hong Kong, and the court will look to the law of the domicile of the deceased in respect of moveable property. It will require evidence of that law, normally by an affidavit of law given by a qualified practitioner in the relevant jurisdiction. Domicile as applied in Hong Kong is a complex issue. It is not the same as residence but is acquired at birth and can be changed only by adopting some other place as one’s long term home.

Inheritance issues are dealt with by the Probate Registry, which is a division of the High Court. The jurisdiction of the Probate Registry extends to all property of the deceased situated in Hong Kong at the date of his/her death. Although a will is effective immediately on death, in order for the personal representatives to deal with that property an order of the court - in the form of either a grant of probate in respect of a will or a grant of administration in respect of an intestate estate - will be necessary.

There are limited arrangements for the Hong Kong court to re-seal grants issued in other jurisdictions (thus avoiding a fresh application) where they also cover Hong Kong assets. At the time of writing this is restricted to grants issued in Tasmania, Victoria and South Australia and the Northern Territory of Australia, New Zealand, Singapore, Sri Lanka and the United Kingdom. In other cases it will be necessary to apply for an original grant in Hong Kong.

The Probate Registry is often criticized for delays in the application process. In simple cases a year is not uncommon, and more complicated cases (particularly involving persons who die domiciled overseas) can take very much longer. For this reason, subject to individual tax considerations, it may be sensible to acquire Hong Kong real property through an offshore corporate vehicle (the shares of which are likely to be subject to probate in their own jurisdiction), or to consider placing substantial assets in a trust. Professional advice should be taken on this however.

Hong Kong law does not apply any form of “reserved portion”.

Where under the domestic law of the deceased there is any form of “forced heirship” the Hong Kong courts may, under arrangements for reciprocal enforcement of judgments, enforce an order made in that jurisdiction relating to the division of the estate, as far as it affects Hong Kong situs assets. Whoever obtains such a foreign judgement would have to try and persuade the Hong Kong court to enforce it. It is far from certain that they would do so, but it remains a technical possibility. If forced heirship issues may be relevant a suitable trust structure may be considered.

A will is desirable.

The making of a will is entirely voluntary, and for cultural reasons many local residents do not do so. However a will is very desirable for a number of reasons. Foremost amongst these is to avoid the application of the statutory rules which govern the devolution of an estate in the absence of a will. These frequently do not coincide with the intentions of the individual concerned.

It is advisable for a lawyer to be instructed to draw up the will, and he would expect to meet the person making the will at some point when taking instructions, but it is not necessary for it to be executed in his presence.

Execution must observe certain formalities. The will must be signed by the testator in the presence of two independent witnesses (i.e. persons who do not stand to benefit under the will), who must then sign the will as witnesses in the presence of the testator and of each other. Anyone of 18 or over can act as a witness, and they do not need to be resident in Hong Kong. The will can be executed out of Hong Kong.

It is not entirely necessary that a separate will be made under Hong Kong law in respect of Hong Kong property. A will validly made under the laws of another country in which, either when it was executed or at his death, the individual was domiciled, habitually resident, or of which he was a national, will be treated as valid in Hong Kong. However the will should be in English or Chinese if further complication is to be avoided.

Nevertheless a separate Hong Kong will is generally advisable and is likely to speed the probate process. It can deal with property in other jurisdictions where appropriate.

In the absence of a will the rather complicated intestacy rules will apply.

The effect of these will depend on the relatives which the deceased leaves behind. Essentially:

a) If he or she leaves a surviving spouse, then:

  1. If there are no surviving children, parent or siblings, the entire estate (after payment of debts and expenses) will devolve on that spouse.
  2. If there are children the spouse will be entitled to a legacy of HK$500,000 and to half of the remainder of the estate absolutely, with the balance passing to the children once they reach the age of 18.
  3. If there are no children but there are parents or siblings living, then the spouse’s legacy increases to HK$1 million before the estate is divided as to half to the spouse and the balance equally between such surviving parents or (if none) siblings.

b) If there is no surviving spouse, then the estate will pass through different levels of relationship, with the members of the highest level taking the entire benefit equally between them. These levels start with the children, and pass through parents, siblings, aunts and uncles and so on. Ultimately, if there is no one who qualifies, then the assets pass to the Hong Kong Government.

Where the deceased died domiciled outside Hong Kong, and the whole of the estate in Hong Kong consists of immovable property, a grant limited to that property may be made in accordance with Hong Kong law (i.e. the intestacy rules), and the priority in which persons are entitled to apply for a grant of administration follows a very similar order to the priority for distributions.

In other cases of a deceased dying domiciled outside Hong Kong the grant may be made to the person entrusted with the administration of the estate by the relevant court of the deceased’s domicile (where a grant of representation has already been taken out in that jurisdiction) or to the person entitled to administer the estate by the law of the place where the deceased died domiciled. Again, this will be established by an affidavit of law by a lawyer qualified in that jurisdiction.

Property can be disposed of during the lifetime of the owner.

In the absence of any specific contractual restraints or conditions of grant affecting a property, the owner of property in Hong Kong is free to dispose of it in whatever manner he sees fit, either during his lifetime or by will. There is no form of Hong Kong inheritance or gifts tax in respect of property situated in Hong Kong.

If however the deceased was domiciled in Hong Kong or ordinarily resident within 3 years of his death and dies leaving certain close relatives or someone who he maintained immediately before his death, then that person may apply to the court for an order that the disposition of the deceased´s estate (by will or on intestacy) does not make reasonable financial provision for the applicant. The court has discretion in these circumstances, after taking a number of factors into account, to make an order for payments or the transfer of assets out of the estate to the applicant or for his benefit.

Property ownership is based on registration of title.

As in any common law jurisdiction Hong Kong law recognises the ability of the owner to divide his interest between legal and beneficial ownership, and to place these in separate hands. Thus behind the registered title the equitable interest may be held on trust for a third party. Such an equitable interest will not be enforced against a bona fide purchaser for value without notice of it, but a gift arising under a will or intestacy would be subject to it.

A separate issue is that of joint ownership of property. Hong Kong law recognises that property may be held jointly (a “joint tenancy”) or in specific shares (a “tenancy in common”). The presumption is that where an interest in land vests in 2 or more persons under an instrument or a will, then unless the contrary intention is expressed in that instrument or will, the tenancy vests in those persons as tenants in common rather than as joint tenants. The importance of this distinction is that rights under a joint tenancy pass automatically to the survivor on death, so that they do not pass under the will and no probate is required.

Marriage does not of itself create a joint tenancy or confer other rights in the property on the spouse. There is no community of property in Hong Kong.

Children can inherit.

A will can appoint guardians of infant children in the case of the death of the last parent, and should do so in order to avoid the necessity of an application to court if the children are in Hong Kong.

Where there are children of a deceased who benefit under the will or an intestacy, they are not entitled to receive property while they are minors and the executors or administrators will hold that property on trust for them at 18 or any later age established by the will. They will be entitled to income at 18 in any event, unless the will expressly provides otherwise. Hong Kong law permits the limited application of funds for the benefit of minors but a will generally provides much wider powers of advancement and payment to the guardians of the infant child.

Other issues.

Although Stamp Duty applies on inter-vivos transfers of immovable property and Hong Kong stock, there is an exemption on transfers arising on death.

The principal issues surrounding inheritance of Hong Kong property tend to be taxation ones in the home country of the deceased or his heirs. Some countries have anti-avoidance legislation covering the treatment of offshore entities and structures and the effect of these provisions have to be considered. These factors may determine a particular structure for holding and devolution of the property.

There are also often completely different taxation considerations for owner-occupied property compared with that held for investment.

Disclaimer.

The foregoing is a general statement of the law as it applies in Hong Kong at the date of writing, but should not be relied upon as legal advice, and professional advice should always be taken in individual circumstances.






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