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Tax

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.

Disclaimer: This article is for reference only. Nothing herein shall be construed as legal advice, whether generally or for any specific 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.