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Trusts for Pets

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Love for our four-legged friends

Our most precious family and friends in later years may be of the four-legged variety and we may worry about how to provide for them after we have departed. 

It was reported by the South China Morning Post in January 2024 that a woman in China left her US$ 2.8 million estate to her beloved cats and dogs. She did have children but they never visited her and her pets were her only comfort when she was aged and ill. Her will stipulated that her entire estate was to be used to care for her pets and their offspring. The local vet clinic was apparently appointed to administrate her estate.

How does one provide for one’s pets in the event of one’s inevitable passing? The simplest way is to discuss the issue with trusted family members or friends and agree verbally that the pets will one day be adopted by a trusted family member or friend. A more formal appointment can be drafted in a will and even include a fixed amount or a regular stipend, to be distributed by the executor of the will to the pet guardian. A lump sum bequest would suffice for a trustworthy pet guardian. On the other hand, a regular stipend, coupled with specific conditions, can incentivise pet guardians to diligently fulfil their responsibilities and ensure that essential health checks are conducted on the pets in their care.

The widow of Gene Roddenberry (creator of Star Trek) passed in 2009 at the age of 76 and purportedly left a US$ 4 million trust to benefit her faithful dogs plus US$ 1 million for a helper to care for them on her estate, for as long as the four-legged beneficiaries lived. In more complex cases, it may be prudent to set up a trust if an estate is particularly large or if the testator wishes to provide for their pets’ offspring i.e., a multigenerational legacy. Depending upon the jurisdiction, there may be tax benefits associated with a trust. A further advantage of setting up a trust is that one can specify how the trust funds are to be used and managed and include provisions for checks and balances. For example, there could be three separate parties in care arrangements – the actual caregiver(s), the entity/person disbursing funds and the entity/person overseeing the arrangements. If a certain property is designated for the exclusive use of said beneficiaries during their lifetime, provisions should be made regarding its eventual sale, including when the property should be sold and how the proceeds should be distributed.

Conclusion

Providing for our precious pets in the event of our passing requires some planning and careful consideration. While a simple verbal agreement or a simple will may be sufficient for some testators, a trust can offer a more comprehensive solution for larger estates or those who wish to provide for their pets’ descendants. By taking the time to plan for our pets’ futures, we can ensure that they receive the care and comfort they deserve in their older years.

Disclaimer: This article is for reference only. Nothing herein shall be construed as Hong Kong legal advice or any legal advice for that matter to any person. Oldham, Li & Nie shall not be held liable for any loss and/or damage incurred by any person acting as a result of the materials contained in this article.

ABCs of Charitable Giving

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The most beautiful bequests fulfil the dreams of their donors. Donors make charitable bequests in their wills in the hopes of leaving the world a slightly better place.

Types of bequests

Charitable bequests can be general, demonstrative, specific or residuary gifts. A general bequest is the gift of a specific amount of money or asset to a charity, without specifying how it should be used. A demonstrative bequest is a gift of a specific asset by the donor, such as an art piece, to a charity. A specific bequest is the gift of a specific amount of money or asset to a charity for a targeted purpose, such as funding for a research project. A residuary bequest is a gift of the remainder of a donor’s entire estate after all other bequests in a will have been made.

The type of charity that one selects may be cultural, environmental, scientific/medical, political or specifically targeted at a disadvantaged group/minority. For example, a donor may choose to support a cultural institution, such as a museum or a theatre, to promote arts and culture. They may choose to support an environmental organization, such as a wildlife conservation group, to protect the natural world. Scientific and medical charities, such as those focused on cancer research or disease prevention, are also popular choices. Political charities, such as those advocating for human rights or social justice, may also be considered. Finally, donors may choose to support charities that target specific groups, such as the elderly or those with disabilities.

Contact the charity

It is always a good idea to contact the charity directly to discuss a bequest in order to better understand their specific needs and their ongoing or latest initiatives. This can help ensure that the bequest is used effectively and efficiently and equally importantly, that the donor’s goals are aligned with those of the charity. Charities may also be able to provide guidance on the best way to structure the bequest, and may be able to offer recognition or other benefits (e.g., tax deductions) to the donor. The donor’s solicitor can review the guidance provided by the charity when drafting the donor’s will and/or trust document.

Targeted or general bequests can be made to specific charities, depending on the donor’s goals and preferences. A targeted bequest is a gift to a specific charity or research program, while a general bequest is a gift to a broader category of charities or causes. For example, a donor may choose to make a targeted bequest to a favourite hospital or research institution, or a general bequest to support medical research more broadly.

Perpetual/lump sum donation?

Perpetual or lump sum bequests can also be made. A perpetual bequest is a gift that is intended to last indefinitely, such as an endowment that provides ongoing funding to a charity. This type of bequest would require careful drafting by the donor’s solicitor in terms of ongoing management of the endowment fund. A lump sum bequest is a one-time gift of a specific amount of money or asset. Perpetual bequests can provide long-term support to a charity, while lump sum bequests can provide immediate/short to medium term funding for a specific project or initiative.

Always consider taxation

When making a charitable bequest, it is essential to consider taxation. In most jurisdictions, charitable bequests are eligible for tax deductions and possibly other benefits. Donor-advised funds, popular in the US and the UK, offer a flexible solution, allowing donors to make their gifts and then recommend how the funds are used over time. This approach can be particularly useful in instances where living donors are undecided about a specific charity but wish to take advantage of the available tax deductions immediately. The drawback is a loss of control over how funds are disbursed as the institution managing the donor advised fund takes control of the fund.

Bequests are revocable

If circumstances or affiliations change during a donor’s lifetime, the revocation of a charitable bequest can be made by asking a solicitor to help write a new will or a codicil to the existing will. This can be done at any time and can help ensure that the donor’s wishes are respected and their goals are achieved.

Charitable bequests can be a powerful way to make a positive impact. By understanding the different types of bequests, selecting charities that align with one’s goals and considering taxation and other implications, donors can ensure that their bequests are used effectively and efficiently to achieve a better world.

Disclaimer: This article is for reference only. Nothing herein shall be construed as Hong Kong legal advice or any legal advice for that matter to any person. Oldham, Li & Nie shall not be held liable for any loss and/or damage incurred by any person acting as a result of the materials contained in this article.

Oldham, Li & Nie to Host “Arbitration and Justice: the Compromise on Insolvency, Illegality and Conflicting Arbitration Clauses?” Panel During the 2024 Hong Kong Arbitration Week

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Oldham, Li & Nie (OLN) is pleased to announce its participation in the 2024 Hong Kong Arbitration Week, organised by the Hong Kong International Arbitration Centre (HKIAC), taking place on 21-25 October 2024.

The firm will host a panel session titled “Arbitration and Justice: the Compromise on Insolvency, Illegality and Conflicting Arbitration Clauses?” on 22 October 2024 from 5:00 to 6:30 pm.

This debate session will critically examine the compatibility between arbitration and substantive/procedural justice in light of the latest case authorities, including:

  1. Sian Participation Corp (In Liquidation) v Halimeda International Ltd [2024] UKPC 16, Re Simplicity & Vogue Retailing (HK) Co., Limited [2024] HKCA 299, and Arjowiggins HKK 2 Limited v Shandong Chenming Paper Holdings Limited [2024] HKCA 352: The availability of bankruptcy / winding-up tools for arbitration-governed debts
  2. AAA v DDD [2024] HKCFI 513: The complication of incompatible arbitration clauses in multi-contract transactions
  3. G v N [2023] HKCFI 3366: The interplay between arbitration and illegality

The session promises to deliver a thorough examination of these critical issues from various expert perspectives.

The distinguished panel will feature:

  • Prof. Anselmo Reyes, International Judge at Singapore International Commercial Court (SICC)
  • William Wong SC, Barrister at Des Voeux Chambers
  • Frances Lok SC, Barrister at Des Voeux Chambers
  • Sarah Thomas, Associate General Counsel of McKinsey & Company

They will be joined by OLN’s lawyers, Partners Dantes Leung and Jonathan Lam, with Associate Davis Hui serving as the moderator. Each panelist will offer unique insights, contributing to a robust and enlightening debate.

For more information about the 2024 Hong Kong Arbitration Week, please visit https://hkaweek.hkiac.org/event/f3e694d2-39ac-451c-aa66-cb9d9af52bc2/summary. 

To register, please visit https://hkaweek.hkiac.org/event/f3e694d2-39ac-451c-aa66-cb9d9af52bc2/regProcessStep1.

Winding-up Without a Debt: Should the Hong Kong Courts Run Around in Circles with The Privy Council?

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(This article was published in the August 2024 Issue of the Hong Kong Lawyer)

In Sian Participation Corp v Halimeda International Ltd [2024] UKPC 16, Ltd the Privy Council made a U-turn on the interplay between arbitration and insolvency by re-affirming the “Traditional Approach” as a matter of law of the British Virgin Islands: notwithstanding any arbitration agreement that governs a winding-up petition debt, the petition should only be stayed or dismissed if the company demonstrates that there is a bona fide dispute on substantial grounds. The Privy Council considered it serious enough to kill two more birds with the same stone by (1) overruling as a matter of English law Salford Estates (No 2) Ltd v Altomart Ltd (No 2) [2015] Ch 589 that where an unadmitted underlying debt of a winding-up petition is subject to an arbitration agreement, a winding-up petition shall be dismissed or stayed save in wholly exceptional circumstances (“Salford Estates Approach”), and (2) adopting the same underlying policy in relation to arbitration clauses and exclusive foreign jurisdiction clauses.

Sian no doubt came as a bolt from the blue, leaving the common law arbitration community in complete shock, not only because for nearly a decade the Salford Estates Approach has not received any major negative treatment by English courts, but also because the Salford Estates Approach has been essentially adopted (albeit with modifications) by the highest courts in other common law jurisdictions, such as Singapore Court of Appeal in AnAn Group (Singapore) PTE Ltd v VTB Bank [2020] SGCA 33 and the Hong Kong Court of Final Appeal in Guy Kwok-Hung Lam v Tor Asia Credit Master Fund LP [2023] HKCFA 9 (“Guy Lam CFA”)(delivered by French NPJ, the former Chief Justice of Australia). Now that the English courts have made a sharp turn, should Hong Kong courts follow suit?

This article seeks to critically examine the reasoning in Sian. With respect, it will be argued that the Privy Council merely defeated a straw man but failed to answer the fundamental question – whether there is a qualifying debt to trigger the winding-up regime for the court to exercise any discretion in the first place. It will be respectfully submitted that the court does not have any final say when the petition debt is governed by an arbitration clause (at least insofar as any factual dispute is concerned) or an exclusive foreign jurisdiction clause, and
so the court cannot determine whether there is indeed a qualifying debt. As a sequel of our article “Lasmos and Beyond: Have the Cake and Eat It Too?” in the May 2020 issue, it is suggested that the Salford Estates Approach is the only irresistible logical approach for the Hong Kong courts to adopt.

Extremity of Sian: Hard Facts Make Bad Law?

Sian was a typical loan recovery case where the respondent applied for liquidation of the appellant for the appellant’s failure to repay the facility, whereas the appellant claimed that it
had a cross-claim against the respondent.

At the outset, it must be pointed out that Sian is extremely extraordinary in the sense that the appellant accepted that the petition debt was not disputed on genuine or substantial grounds given that the appellant did not appeal against such facet of the first instance decision. It was on that basis that the Privy Council took the practical view that to require the creditor to go through an arbitration in that case may just add delay, trouble and expense for no good purpose (Sian, [92]).

In practice, this kind of open acknowledgment of no genuine or substantial dispute on the debt is extremely rare. The more common scenario is that the debtor raises certain disputes
on the debt which the court deems non-genuine and non-substantial. If the petition debt is governed by an arbitration clause, could the court be so confident that any arbitral tribunal
must necessarily reach the very same conclusion as the court would, such that there must be a qualifying debt to trigger the winding-up regime?

Winding-up Without a Debt?

Clearly the courts have no power to wind up companies at their whim. In the insolvency statutes around the common law jurisdictions, there are specific gateways under which a company may be wound up. For example, under section 177 of the Hong Kong Companies
(Winding-up and Miscellaneous Provisions) Ordinance (“HK Winding-up Ordinance”), a company in Hong Kong may be wound up for being unable to pay debts. If a creditor wishes to prove the inability to pay a particular debt, he may either rely on the deeming provision
under section 178 of the HK Winding-up Ordinance by a statutory demand of a liquidated debt of HK$10,000 or more, or fall back on strict proof of the debt (Cornhill Insurance plc v Improvement Services Ltd [1986] 1 WLR 114). Therefore, if the ground to wind up a company is solely on its inability to pay the petition debt, then logically the making of a winding-up order must necessarily involve the determination of the existence of the “debt”.

Hence in Guy Kwok-Hung Lam v Tor Asia Credit Master Fund LP [2022] 4 HKLRD 793 (“Guy Lam CA”), the Hong Kong Court of Appeal held that firstly, there is indeed judicial determination of a company’s indebtedness in the bankruptcy proceedings ([68]); secondly, until the creditor is established as “a creditor”, he simply has no locus standi present any petition ([77]). In the same vein, in Guy Lam CFA, French NPJ did not rule out the possibility of a mandatory stay of the bankruptcy proceedings in favour of arbitration ([91]).

The Privy Council attempted to dispel this clear logic by explaining that to make a winding-up order is “only a provisional assumption that the company is insolvent, which may turn out to be untrue, without that invalidating the liquidation process”. With all due respect, such a contention is only a straw man – when the winding- up petition is concerned with the petition debt in particular, the real question is not whether the company is or is not “insolvent” overall (which position may fluctuate until all assets are realised), but whether there is or is not a qualifying debt that triggers the winding-up regime. The “most spectacular recent example” of the substantial net surplus of the Lehman Brothers International Europe Ltd is neither here nor there. The Privy Council did not cite any case authority whatsoever to support the proposition that the non-existence of the petition debt does not invalidate the liquidation process. Likewise, none of the pre- Salford case authorities cited by the Privy Council actually supports that illogical proposition.

In Re Vitoria [1894] 2 QB 387, the English Court of Appeal was concerned with whether a creditor can petition to bankruptcy on the strength of a judgment debt again if its first petition on the very same judgment debt had been dismissed on procedural grounds. Obviously the first bankruptcy petition proceedings should not be conflated as an appeal of the underlying judgment debt, so it was on that basis that the English CA granted the bankruptcy order on the second occasion. What the English CA did not say, however, is that the court has power to bankrupt someone even if there is no qualifying debt at all; on the very contrary, there was a clear unreversed judgment debt in that case to justify the bankruptcy order.

In Tanning Research Laboratories Inc v O’Brien [1990] HCA 8, the High Court of Australia held that any disputed debt by the liquidator may be referred to the court or to arbitration. That is uncontroversial. However, that case did not concern a petition debt governed by an arbitration clause. In any event, the High Court of Australia also did not suggest that the non-existence of a petition debt would not invalidate the liquidation process.

In Re Menastar Finance Ltd [2003] BCC 404, the English High Court considered a challenge by one creditor against the liquidator’s acceptance of the proof of a judgment debt upon which the winding up petition was originally based. Since the challenge was dismissed in the end, that case certainly does not support in any way the proposition that a company may be wound up without a qualifying debt. Whilst it is true that the liquidator and ultimately the Companies Court may look behind a judgment debt, they may do so only if there is evidence of fraud or collusion or miscarriage of justice. Thus, investigating a judgment debt is the exception rather than the general rule. More importantly, there is no reason why the application of the principle “fraud unravels all” should stop at the judgment debt without invalidating the liquidation process.

Which Institution Has the Final Say?

One might ask: if the court may wind up a company without a judgment where the court has jurisdiction over the petition debt, why could it not do so where the petition debt is governed by an arbitration clause or an exclusive foreign jurisdiction clause? Obviously, where the court has jurisdiction over the petition debt, and holds that the debtor has no genuine or substantial dispute over the debt, one can safely presume that the court would be consistent in reaching exactly the same conclusion that there is indeed a debt even if disputed by the liquidator in the end, save in wholly exceptional circumstances as set out in Re Menastar.
This presumption is not safe anymore in the case of an arbitration clause or an exclusive foreign jurisdiction clause.

It is respectfully submitted that the ultimate test to determine whether the court may make a winding-up order without a judgment or an arbitral award is this: Which institution – the local court, the arbitral tribunal, or the foreign court – has the final say on the substantive merits of the petition debt? Whilst the Privy Council appears to equate arbitration clauses with exclusive foreign jurisdiction clauses on this issue, in which case the arbitral tribunal or the foreign court would have exclusive jurisdiction (Sian, [66]), it is respectfully suggested that there is one critical nuance.

In the arbitration statutes around the common law jurisdictions, a substantive appeal mechanism is usually preserved under limited circumstances unless the parties agree otherwise. For example, under paragraphs 5 and 6 of Schedule 2 to the HK Arbitration Ordinance, a party to a Hong Kong arbitration may appeal to the court against an arbitral award on a point of law where the award is “obviously wrong”. Therefore, if the existence of the petition debt involves a pure question of law, arguably the court has the final say, for the court could take the extreme view that any contradictory arbitral award would be “obviously wrong” on the pure question of law. However, this appeal mechanism does not apply to questions of fact, and in any event, does not exist for foreign judgments, in which cases the court has no final say on the existence of the petition debt.

Where the court has no final say on the substantive merits of the petition debt, it follows that the court cannot determine the existence of the petition debt, the pre-requisite for granting a winding-up order on the basis of the petition debt. No wonder no English court has yet found circumstances so “exceptional” to justify a winding-up order (Shaun Matos, “Arbitration Agreements and the Winding-Up Process: Reconciling Competing Values” (2023) 72 ICLQ 309, 313), even though the Salford Estates Approach reserves that mere possibility.

Balancing Public Policies

The Privy Council took pains to stress that to require the creditor to go through an arbitration where there is no genuine or substantial dispute on the debt just adds delay, trouble and expense for no good purpose (Sian, [92]). Yet, it begs the question as to which institution – the local court, the arbitral tribunal or the foreign court – shall have the final say as to whether there is a genuine or substantial dispute, or not. Although liquidation is an important statutory process to bring about an efficient realisation of the company’s assets and their fair distribution among all its stakeholders (Sian, [32]), it is also a draconian process that causes serious disruptions to the business and irreversible damage to the company. Balancing against the legitimate interest of the company and its effect on the economy as a whole, the liquidation class remedy should not be lightly invoked except under clear and uncontroversial circumstances that fall squarely within the black letter law.

Even if one is not entirely convinced that the mandatory stay provision in the arbitration statutes (e.g. section 20 of the HK Arbitration Ordinance) is engaged, it would constitute a “denying the antecedent” fallacy (i.e. If A then B; not A therefore not B.) to say that the court may not or should not adopt a default position to stay or dismiss a winding- up petition when the debt is governed by an arbitration clause or an exclusive foreign jurisdiction clause (Sian, [75]). With respect, the proper question is not whether the court’s exercise of discretion is “fettered” (Sian, [82], citing Re Asia Master Logistics Ltd [2020] 2 HKLRD 423) or “curtailed” (Sian, [83], citing But Ka Chon v Interactive Brokers LLC [2019] HKCA 873), but whether it makes sense for the court to adopt such a default position, having regard the company’s ability to pay its “debts”. In our respectful submission, it does make perfect logical sense for the court to adopt a default position to stay or dismiss the petition when it cannot possibly have the final say on the existence of the petition debt, so as to achieve consistency and to balance the legitimate business interest of the company and the interest of the economy as a whole.

Hong Kong Approach: For Better or Worse?

The Salford Estates Approach could be said to be first “localised” in Hong Kong in Re Southwest Pacific Bauxite (HK) Ltd [2018] 2 HKLRD 449 (“Lasmos Approach”), albeit with modifications. One major difference between the two approaches is that the Lasmos Approach adds an additional requirement that the debtor company takes steps to commence the contractually mandated dispute resolution process. So far the Lasmos Approach has not been officially endorsed, whether in Guy Lam CA or Guy Lam CFA or otherwise. In Re Simplicity & Vogue Retailing (HK) Co., Limited [2024] HKCA 299, the Court of Appeal took the view that the additional requirement in the Lasmos Approach is not onerous for the debtor to demonstrate that there is a genuine intention to arbitrate.

As argued in our previous article, it is difficult to justify the additional requirement in the Lasmos Approach. The lack of onerousness plainly does not justify the imposition of a legal requirement. Besides the concerns already raised, whether the debtor company has or has not taken the contractually agreed steps does not change the fact that the local court has no final say on the substantive merits of the petition debt if it is governed by an arbitration clause or an exclusive foreign jurisdiction clause. Similar concerns are shared by, for example, Shaun Matos, who exposed the absurdity in attaching deference to the arbitral tribunal instead of the arbitration agreement (“Reconciling Competing Values”, 330).

In Guy Lam CFA, the top court in Hong Kong adopted the “multi-factorial” approach, attempting to balance the “strong cause” of arbitration clause or exclusive foreign jurisdiction clause in favour of a stay or dismissal of a petition against other “countervailing factors” such as disputes bordering on the frivolous or abuse of process. With respect, such a formulation is dangerous and open to manipulation and should be avoided, for it breeds a tendency to be seen as “old wine in a new bottle” – see Sun Entertainment Culture Limited v Inversion Productions Limited [2023] HKCFI 2400 for example, where DHCJ Le Pichon ordered the winding-up on the basis of the “frivolous nature of the defence”, thereby judging the substantive merits of the defence though Her Ladyship may not have the final say due to the applicable arbitration clause.

Conclusion

Undoubtedly this issue of interplay between arbitration and insolvency is a vital one. As the Privy Council acknowledged, the overwhelming majority of winding-up petitions concern debts (Sian, [27]). It is unfortunate that the Privy Council ran away from the logical Salford Estates Approach and returned to the Traditional Approach, in total disregard of the statutory requirement of a qualifying debt before any possible winding-up, when the court does not and cannot have any final say on the substantive merits of the petition debt. It is understandable that the court wishes to preserve the winding-up regime for debts governed by an arbitration clause (Sian, [93]), yet let us not forget that there are other gateways in the insolvency statutes that the court can wind up a company in a more natural and logical way, for example, by reference to balance sheet insolvency, or justice and equity. The court need not twist the logic to do the impossible. It is hoped that the English courts will turn around again in time, and the HK courts will make logical contribution to the development of this area of the common law.

Hong Kong – A Haven for Tax-Free Transfers of Gifts

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Hong Kong stands out as a tax-free gifting jurisdiction, making it an attractive destination for individuals looking to transfer assets to lovers and other strangers alike. Unlike many other countries, Hong Kong does not levy any gift tax, allowing for tax-free gifts of property, investments and other assets (although it should be noted that transfers of real property and shares are subject to stamp duty).

This favourable tax environment has made Hong Kong a popular choice for those seeking to manage their estate planning and wealth transfer strategies. The absence of gift tax regulations in Hong Kong provides significant flexibility and planning opportunities, enabling individuals to gift assets without the burden of additional taxation.

One key aspect of Hong Kong’s gift tax policy is its broad application. Gifts made between family members, as well as transfers to unrelated parties, are all exempt from any gift tax. This simplicity and lack of complex rules or thresholds have contributed to Hong Kong’s appeal as a destination for seamless, tax-efficient gift-giving. Hand in hand with tax-free gifting is the lack of estate or inheritance taxes in Hong Kong. Normally estate, gift and inheritance taxes (or the lack thereof) go hand in hand so there is a coordinated effort to either ensure individuals are able to achieve tax-free transfers of their assets or ensure individuals are taxed on gifting their assets, depending upon the jurisdiction’s desire.

The United States – A Balance Between Gift and Estate Taxes

In contrast to Hong Kong, the United States has a more nuanced approach to gift taxation. The United States imposes a federal gift tax on certain transfers of property, with a lifetime exemption amount that is currently set at US$13.61 million per individual and US$27.22 million per couple (as of 2024).

 An individual making gifts that exceed the annual threshold amount (currently set at US$18,000 per recipient per year) must file a gift tax return and potentially pay a gift tax, depending on their overall lifetime gift and estate tax exemption usage. However, a number of gifts made between spouses (e.g., up to US$185,000 to a non-US citizen spouse) or to charitable organizations are exempt from this requirement.

The integration of gift and estate taxes in the United States aims to ensure that individuals do not simply during their lifetimes gift away their assets to avoid estate taxes upon their passing. This coordinated system helps maintain the integrity of the overall wealth transfer taxation framework in the country as there is an established estate tax regime in place at the federal and often state level, with six states also imposing an inheritance tax.

The United Kingdom

In the United Kingdom, gifts are tax-free up to £3,000 per annum for a person’s estate, which may appear quite stingy compared to other regimes but this is part of the inheritance tax system. Any unused exemption may only be carried forward one year. There is a clawback in the form of inheritance tax for some gifts made less than 7 years before one’s death. Fortunately, there are a number of other exemptions in place, such as full exemption on gift and inheritance taxes for gifts given to spouses and civil partners, provided they are UK domiciled. Regular gifts to help with living costs such as paying a child’s rent that are made out of a donor’s regular monthly income as well as gifts under £250 are also exempt. To conclude, gifts made over 7 years before death are tax-free.

The European Union – Diverse Approaches to Gift Taxation

Within the European Union, the treatment of gift tax varies significantly across member states, as would be expected. While some countries like Estonia do not impose a standalone gift tax, other countries like Germany and France have specific gift tax regimes in place. Germany, for instance, levies an intricate gift tax on transfers of property, with tax rates ranging from 7% to 50% depending on the relationship between the donor and the recipient, as well as the value of the gift. France has an even more complex system that takes into account the frequency of gifts, the relationship between the parties and the value of the transferred assets. France’s gift tax ranges from 5% to 45% for direct line relatives and up to 60% for unrelated recipients but allowances do exist.

Different approaches within the European Union highlight the importance of understanding specific gift tax regulations when engaging in cross-border wealth transfers. Individuals and families seeking to make gifts must carefully navigate the specific rules and requirements of each relevant jurisdiction.

Other Notable Jurisdictions

Beyond Hong Kong, the United States and the European Union, there are several other notable jurisdictions with unique approaches to gift taxation. Australia generally does not have a gift tax, but certain gifts of real property or shares may be subject to capital gains tax or other tax implications. Canada does not have a standalone gift tax, but gifts may be subject to income tax or capital gains tax considerations once realised. Japan has a gift tax regime with progressive tax rates ranging from 10% to 55%, depending on the value of the gift, the relationship between the parties and certain deductions. Gift and inheritance taxes, working hand in hand, are high in Korea. Both gift and inheritance taxes range from 10% to 50%.

The global landscape of gift tax is a complex and ever-evolving landscape, with each jurisdiction offering its own set of rules, exemptions and tax implications. Understanding these nuances is crucial for individuals and families seeking to navigate the intricacies of cross-border wealth transfers, avoid potential double taxation and ensure compliance with the relevant gift tax regulations. To conclude, we reference the old adage, “The best things in life are free”. Not only are true love, true friendship and beautiful sunsets free, but so is tax-free gifting in Hong Kong.

Disclaimer: This article is for reference only. Nothing herein shall be construed as Hong Kong legal advice or any legal advice for that matter to any person. Oldham, Li & Nie shall not be held liable for any loss and/or damage incurred by any person acting as a result of the materials contained in this article.

On Death and Taxes Around the World

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“Nothing can be said as certain except death and taxes” is the phrase attributed to Benjamin Franklin, US Founding Father and polymath. To avoid adding insult to injury, we would recommend trying to avoid taxes after death.

The US Treasury reported on 28 February 2023 that an amount of US$7 billion for “estate and gift taxes” was collected on that day, the highest amount collected since at least 2005. Privacy rules prohibited the disclosure of further details but speculation was rife about the identity of the person(s) who may have had to make this payment, either as a deposit as part of advance estate planning (to avoid having to pay an even higher amount in the future) or a delayed payment by a late billionaire, possibly due to an enforcement action.

Hong Kong abolished estate duty on 11 February 2006. Thereafter, no estate duty affidavits and accounts have been required and no estate duty clearance papers have been needed for the application for a grant of representation in respect of deaths in Hong Kong.

However, in the United Kingdom, inheritance tax (IHT) is still applicable. IHT is charged at 40% on the value of an estate above the nil-rate band, which is currently set at £325,000 per person. Any unused nil-rate band can be transferred to a surviving spouse or civil partner, effectively giving one person a £650,000 nil-rate band. There are various useful exemptions and reliefs available to reduce the IHT liability. For example, if everything is bequeathed to a surviving spouse or civil partner, a charity or a community amateur sports club, then IHT would not be payable.

For citizens and residents of the United States, the federal estate tax exemption for 2023 is US$12.92 million per individual (US$25.84 million per married couple). The highest federal estate tax rate is 40%. Many US states also impose their own estate or inheritance taxes, with exemption levels and rates at varying rates. There are no state estate taxes payable in 33 of the 50 statues, such as Alabama, Alaska, Arizona, Arkansas, California, Colorado, Delaware or Florida, just to name a few.

In Canada, there is no federal estate tax or inheritance tax. However, upon death, there is a deemed disposition of all capital property, which can trigger capital gains taxes payable by the estate of the deceased. The deceased’s final tax return must report all capital gains and losses, as well as regular income. The top marginal tax rate in Canada can reach a whopping 54% depending on the province.

In the European Union, estate and inheritance tax rules differ significantly across member states. 19 of 27 EU countries still levy some form of death tax. 8 EU countries (Austria, Cyprus, Estonia, Latvia, Malta, Romania, Slovakia and Sweden) have abolished inheritance taxes. The applicable rules and exemptions vary widely depending on the specific country, the relationship between the deceased and the beneficiary and the size of the estate. Tax rates also vary widely, from 0-20% in Poland to 7.65-87.6% in Spain.

Taiwan has a progressive inheritance tax from 10-20% on assets exceeding a certain threshold, currently set at NTD13.3 million, with exemptions and deductions available for heirs and funeral expenses.

Singapore has no estate, inheritance or capital gains tax but stamp duty may be payable upon the transfer of company shares in a Singapore company.

Macau, a special administrative region of the People’s Republic of China like Hong Kong, also has no inheritance tax.

Mainland China once issued a draft rule on inheritance tax in 2002 but a statute has never been passed. There are currently no estate, gift or inheritance taxes.

By contrast, it was reported in 2021 that the estate of Samsung Electronics chairman Lee Kun-hee will have paid more than 12 trillion won (US$10.78 billion) in inheritance taxes as South Korea has one of the highest rates of inheritance tax in the world. A premium can be added to a deceased’s ownership of shares that comprise a controlling interest in a company, potentially topping the standard 50% inheritance tax. It was reported that Mr Lee’s collection of fine art including works by Chagall, Gaugin, Miro, Monet and Picasso will be donated to the National Museum of Korea to help relieve some of the tax burden.

The taxation of estates and inheritances varies widely around the world, with some jurisdictions like Hong Kong abolishing them altogether while others maintain complex systems of deduction, exemptions and increasing marginal rates. As individuals plan their financial affairs and legacies, it is important to stay up-to-date with the estate and inheritance tax landscape in relevant jurisdictions. Careful estate planning can help to eliminate or at least minimise the tax burden on heirs and ensure a smooth transition of wealth across generations. Whilst death and taxes may be a certainty, taxes after death can be skilfully avoided with professional guidance.

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