UK Domicile Implications for Hong Kong Family Trusts: The Remittance Basis and Worldwide Taxation

The UK government’s decision, confirmed in the Spring Budget 2024 and enacted via the Finance Act 2025, to abolish the remittance basis of taxation for individuals domiciled outside the UK (non-doms) from 6 April 2025 represents the most significant shift in British personal taxation in a generation. For Hong Kong-based families with UK connections — whether through a family member’s residence, a property portfolio, or a cross-border trust structure — this reform directly dismantles the core planning assumption that UK non-domiciled status could shield foreign income and gains from UK taxation until remitted. The new regime replaces the remittance basis with a residence-based system, meaning that after four years of UK tax residence, an individual becomes subject to UK taxation on their worldwide income and gains, regardless of domicile. For a Hong Kong family trust holding assets in the UK, the implications are structural: the trust’s own tax status, the settlor’s exposure, and the beneficiaries’ liability all require immediate re-evaluation. This article examines the mechanics of the abolition, its interaction with Hong Kong trust law under the Trustee Ordinance (Cap. 29), and the specific planning pathways — including the new Foreign Income and Gains (FIG) regime and the potential for trust restructuring — that remain available to families navigating this transition.

The Abolition of the Remittance Basis: Mechanics and Transitional Provisions

The Finance Act 2025, receiving Royal Assent on 20 March 2025, formally repeals the remittance basis of taxation for non-UK domiciled individuals, effective from the 2025/26 tax year. The new regime, termed the “residence-based system” by HM Revenue & Customs (HMRC), introduces a four-year Foreign Income and Gains (FIG) regime as the sole concession for newly arrived UK residents.

The Four-Year FIG Regime

Under the FIG regime, an individual who has not been UK tax resident in any of the ten preceding tax years may elect to exclude foreign income and gains from UK taxation for the first four years of UK residence. This election, made on an annual basis via the UK tax return, applies automatically to all foreign income and gains arising in that year, with no requirement to remit funds to the UK. After the four-year window expires — specifically from the fifth year of UK residence onwards — the individual becomes subject to UK taxation on their worldwide income and gains on the arising basis, irrespective of domicile.

HMRC’s published guidance (April 2025) confirms that the FIG regime applies to individuals, not trusts. For a Hong Kong family trust, this distinction is critical: the trust’s own tax status depends on the residence of its trustees and the nature of its income, not solely on the settlor’s or beneficiaries’ FIG elections.

Transitional Provisions for Existing Non-Doms

For existing non-doms who were UK resident before 6 April 2025, the transitional rules offer a limited window. Individuals who have been UK resident for fewer than four years as of 5 April 2025 may use the remainder of their four-year FIG period. Those who have been resident for four years or more lose access to the remittance basis entirely from 6 April 2025 and must report all worldwide income and gains on the arising basis from that date.

A separate transitional provision allows for the rebasing of capital assets held at 5 April 2025 to their market value on that date, provided the asset was held by the individual personally (not through a trust) and was previously subject to the remittance basis. This rebasing election, under Schedule 8 of the Finance Act 2025, must be made by 31 January 2027.

Impact on Trust Structures

The abolition directly affects the “protected trust” concept under previous UK tax law. Under the old regime, a trust settled by a non-domiciled settlor could accumulate foreign income and gains without UK tax liability, provided no UK-resident beneficiary received a benefit. That protection is now removed for trusts where the settlor has been UK resident for more than four years. From 2025/26, such trusts are treated as “settlor-interested” for UK tax purposes, meaning the settlor is taxed on all trust income and gains as they arise, regardless of distribution.

Hong Kong Trust Law and the UK Tax Nexus: The Trustee Ordinance and Domicile

Hong Kong’s Trustee Ordinance (Cap. 29) provides the legal framework for trust creation and administration, but it does not address tax domicile directly. The interaction between Hong Kong trust law and UK taxation turns on three variables: the residence of the trustees, the governing law of the trust, and the domicile of the settlor and beneficiaries.

Trustee Residence and Trust Tax Status

Under UK tax law, a trust is considered UK resident if all or a majority of its trustees are UK resident. For a Hong Kong family trust, if the trustees are Hong Kong residents (individuals or a licensed trust company under the Hong Kong Monetary Authority’s supervision), the trust is generally non-UK resident for UK tax purposes. However, HMRC’s guidance (Trusts, Settlements and Estates Manual, TSEM 3000) clarifies that a trust with a UK-resident settlor who retains an interest — such as a power of revocation or a right to income — is treated as UK resident regardless of trustee location.

For a Hong Kong family trust settled by a UK-domiciled individual who has been UK resident for more than four years, the trust is now effectively UK resident for tax purposes, even if all trustees are based in Hong Kong. This means the trust must file UK tax returns and pay UK tax on its worldwide income and gains, including income from Hong Kong property, dividends from Hong Kong-listed stocks, and gains from disposing of Hong Kong assets.

The Domicile of the Settlor and Beneficiaries

UK domicile is a distinct legal concept from residence. An individual acquires a domicile of origin at birth (typically the father’s domicile) and can acquire a domicile of choice by residing in a jurisdiction with the intention of permanent or indefinite residence. For a Hong Kong family, a UK-domiciled settlor — perhaps a Hong Kong permanent resident born in the UK — remains UK-domiciled for UK tax purposes unless they can demonstrate abandonment of that domicile, a high evidentiary threshold under UK case law (e.g., Henderson v Henderson [1965]).

The Finance Act 2025 does not abolish the concept of domicile for all purposes. Domicile remains relevant for inheritance tax (IHT), where a UK-domiciled individual is subject to IHT on their worldwide estate, while a non-UK domiciled individual is subject only on UK-situated assets. The IHT threshold for non-doms is GBP 325,000 for UK assets, with no exemption for foreign assets.

Hong Kong’s Position on Trust Taxation

Hong Kong does not impose tax on trust income or gains as such. Under the Inland Revenue Ordinance (Cap. 112), Hong Kong taxes profits arising in or derived from Hong Kong, but trusts are not separate taxable entities. Instead, beneficiaries are taxed on distributions received, and only if the distribution represents Hong Kong-sourced income. This territorial system means a Hong Kong trust can accumulate foreign income — including UK rental income or capital gains from UK property — without Hong Kong tax liability, provided the income is not sourced in Hong Kong.

The conflict arises when UK tax law deems the trust to be UK resident and taxes that same income. Double taxation relief is available under the UK-Hong Kong Double Taxation Agreement (DTA), signed in 2010 and effective from 2011, but the DTA does not eliminate the compliance burden: the trust must still file UK returns and claim relief.

Cross-Border Structuring Options for Hong Kong Families Post-Abolition

Given the abolition of the remittance basis, Hong Kong families with UK connections have several structuring paths, each with distinct tax, legal, and administrative implications.

Option 1: The Excluded Property Trust

An excluded property trust is a trust where the settlor is non-UK domiciled at the time of settlement and the trust assets are situated outside the UK. Under UK IHT law (Inheritance Tax Act 1984, s.48(3)), such trusts are outside the scope of UK IHT, even if the settlor later becomes UK resident. For a Hong Kong family, this structure remains viable if the settlor can demonstrate non-UK domicile at settlement — a fact that must be documented with evidence of the settlor’s long-term residence in Hong Kong, absence of a UK domicile of choice, and no intention to return to the UK permanently.

The key limitation: assets that are UK-situated — such as UK real estate, shares in UK companies, or bank accounts with UK branches — are not excluded property. For a family holding a GBP 5 million London residential property, the trust would need to hold the property through a non-UK corporate vehicle (e.g., a BVI company) to keep the asset non-UK situated. HMRC’s guidance on “enveloped” property (Schedule 4A to the Taxation of Chargeable Gains Act 1992) imposes an annual charge on such structures, currently GBP 4,450 for properties valued at GBP 2-5 million, rising to GBP 28,650 for properties over GBP 20 million.

Option 2: The Non-UK Resident Trust with a UK-Resident Beneficiary

For a trust where the settlor is non-UK resident (having left the UK permanently) but beneficiaries include UK residents, the trust structure can still operate under the “capital payments” regime. Under UK tax law (Taxation of Chargeable Gains Act 1992, s.87), a non-UK resident trust that makes a capital payment to a UK-resident beneficiary triggers a charge to UK capital gains tax on the beneficiary, calculated by reference to the trust’s accumulated gains.

For a Hong Kong family, this means careful management of distributions. A trust that has accumulated gains from selling Hong Kong property or stocks must track those gains separately from UK-sourced gains. A distribution to a UK-resident beneficiary of HKD 10 million (approximately GBP 1 million) could trigger a UK tax liability of up to 24% (the current UK capital gains tax rate for residential property) on the attributed gains, unless the trust has paid UK tax on those gains already.

Option 3: Surrender of UK Residence

For a Hong Kong family member who has been UK resident for more than four years and faces full worldwide taxation, the most direct option is to surrender UK residence entirely. Under the UK Statutory Residence Test (SRT), an individual is non-UK resident if they spend fewer than 16 days in the UK per tax year (or fewer than 46 days if they have been UK resident for fewer than three of the preceding four years). For a Hong Kong-based family office principal who travels to the UK for business, this requires strict diary management: each day spent in the UK counts toward the threshold, and a single day over the limit resets the residence clock.

The SRT also includes a “ties” test: if the individual has family, accommodation, or work ties to the UK, the permitted days drop to as low as 16. For a Hong Kong family with a child studying at a UK boarding school, that child’s presence constitutes a “family tie,” reducing the parent’s permitted UK days to 90 per year (if the parent has been UK resident in one of the preceding four years).

Actionable Takeaways for Hong Kong Family Trusts

1. Review all existing trust deeds by 31 December 2025 to identify settlor interests, powers of revocation, and beneficiary classes that may trigger UK settlor-interest treatment under the Finance Act 2025, and consider amending the deed to remove such powers if the settlor is UK resident for more than four years.

2. Rebase personally held UK assets to 5 April 2025 market value by filing the election under Schedule 8 of the Finance Act 2025 before 31 January 2027, to crystallise the historic gain at the pre-abolition value and reduce future UK capital gains tax exposure on disposal.

3. Segregate UK-situated assets into a separate non-UK corporate vehicle (e.g., a BVI company) to maintain excluded property trust status for IHT purposes, but budget for the Annual Tax on Enveloped Dwellings (ATED) charges, which range from GBP 4,450 to GBP 28,650 per property per year depending on value.

4. Implement a strict UK day-counting protocol for all family members who travel to the UK, using the Statutory Residence Test framework (HMRC guidance RDR3) to ensure no single tax year exceeds the permitted thresholds, and document all days with contemporaneous travel records.

5. Engage dual-qualified UK and Hong Kong tax counsel to prepare a cross-border trust tax opinion before 6 April 2026, covering the trust’s UK residence status, the settlor’s domicile analysis, and the beneficiaries’ exposure under the capital payments regime, with specific reference to the UK-Hong Kong DTA.