The Revenue (Abolition of Estate Duty) Ordinance 2005 [“the Ordinance”] came into effect on 11 February 2006. No estate duty affidavits and accounts need to be filed and no estate duty clearance papers are needed for the application for a grant of representation in respect of deaths occurring on or after that date. The estate duty chargeable in respect of estates of persons dying on or after 15 July 2005 and before 11 February 2006 (“transitional estates”) with the principal value exceeding $7.5 million will be reduced to a nominal amount of $100.
The old law is set out in the Estate Duty Ordinance. Estate duty had the following characteristics:
- It was based on the territorial principle and was thus only levied on property situate in Hong Kong. The deceased’s nationality, residence or domicile were completely irrelevant in determining whether an estate duty charge arose. The following examples show when a charge arose and when a charge did not arise:
- Bank accounts: A charge arose if the bank account was in the territory.
- Contract Debts: A charge arose on monies owing to the deceased by way of a contract debt if the debtor resided in Hong Kong.
- Registered Shares: Registered shares were in Hong Kong if the share register is situated there.
- Bearer Instruments: were located at the place in which they were physically present at the time of death.
- Patents and Trademarks: were located in the jurisdiction in which they can be transferred according to the law under which they were created or registered.
Estate Duty Tax Rates: The tax was levied at progressive rates with no estate duty being payable where the value of the estate situate in Hong Kong was less than US$962,000 and a maximum rate of 15% being levied on the value of assets exceeding US$1,350,000.
- Controlled Company Legislation: A deceased shareholder could be assessed to estate duty on the value of Hong Kong situate assets owned by a resident or non-resident company in which the deceased had a shareholding provided the company was deemed a “controlled company”. The purpose of this legislation was to prevent avoidance of estate duty by the misuse of the corporate structure.
- Quick succession relief was available and meant that lower rates of estate duty were payable where assets changed hands frequently as a result of several deaths closely connected in time (under 5 years).
- Penalties for delayed payment are severe and include an interest rate of 8% per annum and the doubling of the rate of estate duty payable.
- For estate duty purposes no deduction was allowed for debts owing by the deceased except where those debts were contracted in Hong Kong to a person ordinarily resident in Hong Kong or alternatively charged on property situate in Hong Kong.
- Assets which passed up to 3 years prior to death by way of an inter-vivos gift are deemed to be part of the estate for estate duty purposes. However, such gifts were exempt from estate duty if either:
- Their value was less than US$26,000 or
- The gift was made in consideration of marriage or
- The gift was part of the deceased normal expenditure.
The following were exempt from an estate duty assessment:
- The deceased’s matrimonial home was not included in the computation where he left the same to a surviving spouse.
- The proceeds of any life insurance policy paid out in Hong Kong were considered a separate estate in themselves. Thus, if the value of the life insurance payment was less than US$962,000 no estate duty is payable on it irrespective of the value of the other assets comprising the estate.
- Assets which were located outside the territory of Hong Kong;
- Assets which were disposed of for a charitable purpose more than one year before death.
- Any property passing on death and held by the deceased as a trustee under a trust formed more than 3 years before death. Alternatively, any property passing on the death of the deceased and held by the deceased under a trust not formed by the deceased.
- Property consisting of a pension, annuity, lump sum gratuity, or other similar benefit passing on the death member of a recognized occupational retirement scheme under the terms of that scheme.
Legislation that sought to abolish estate tax in Hong Kong was gazette in May 2005.
It is estimated that the abolition of estate duty will cost the Government annual tax revenues of around $1.5 billion. However, the abolition of estate duty is expected to encourage investments in both financial assets and the property market in Hong Kong, thereby contributing additional revenue from stamp duty and other taxes.