Deacons
  April 11, 2006 - Hong Kong

Hong Kong: Certain Practical Effects for Banks of the Revenue (Abolition of Estate Duty) Ordinance 2005

On 2 November 2005, the Legislative Council enacted the Revenue (Abolition of Estate Duty) Ordinance ("RAEDO"). It came into operation on 11 February 2006. RAEDO, among other things: (i) abolishes estate duty as proposed in the 2005 - 2006 Budget; and (ii) empowers the Secretary for Home Affairs ("SHA") to release money from bank accounts of deceased persons and allow inspection of bank safe deposit boxes. ABOLITION OF ESTATE DUTY Previously, the estate of a deceased person was subject to estate duty ranging from 5% to 15% where the principal value of his Hong Kong estate exceeded HK$7.5 million. Under RAEDO, estates of persons who die on or after 11 February 2006 won’t be subject to estate duty. For deaths between 15 July 2005 and 10 February 2006, a nominal HK$100 is chargeable for estates assessed at HK$7.5 million or more. Any estate duty overpaid will be refunded. POSITION UNDER OLD LAW IN RELATION TO JOINT ACCOUNTS AND "INTERMEDDLING" The old legislation prohibited "intermeddling" i.e. dealing with the assets of a deceased person before obtaining estate duty clearance. This was relevant to banks in the case of joint accounts. The issue was - could a bank release funds in a joint account to the survivor without estate duty clearance? Some banks refused to release funds without this clearance, notwithstanding the "right of survivorship" of the surviving joint account holder. In June 2004, the Inland Revenue issued a circular to the Hong Kong Association of Banks ("IRD Letter") confirming that banks could release funds in joint accounts to survivors provided they (i) were not on notice that the account was being held on trust for the deceased and (ii) complied with the legislation’s requirement to notify the IRD of the death. EFFECT OF CHANGES TO LAW IN RELATION TO JOINT ACCOUNTS The abolition of estate duty means estate duty clearance is no longer necessary. However, RAEDO leaves the intermeddling provisions of the Estate Duty Ordinance ("EDO") largely intact and introduces a new intermeddling provision into the Probate and Administration Ordinance ("PAO") - Section 60J, PAO. This makes it an offence to deal with any property in a deceased’s estate which is not scheduled to a grant of probate or to applications under the PAO for small estates to be administered by the Official Administrator or for foreign probates to operate in Hong Kong. Section 60J, however, provides specific defences to banks and their employees. A bank and its employees will be treated as having acted with lawful authority, provided the employees acted in good faith and exercised due care: 1. if they deal with assets in a deceased’s estate under provisions inserted into the PAO by RAEDO about (i) releasing funds from an individual bank account (not a joint account) to pay funeral expenses and maintenance, and (ii) inspection of and release of items from safe deposit boxes (see below); and 2. if they allow a surviving renter of a safe deposit box access to the box under a provision inserted into PAO by RAEDO about jointly owned safe deposit boxes (see below). Two points to note here: 1. If a bank/its employees act in accordance with Certificates issued by the SHA (see below), it is unclear what else they must do to show their good faith/exercise of due care. 2. Protections in the PAO don’t relate to joint accounts and it is unclear whether the IRD Letter still holds good re payments to surviving account holders. Given the new PAO intermeddling provisions, should banks wait until the applicable conditions are met before releasing funds? Clarification from the IRD would be helpful. NEW POWERS OF THE SECRETARY FOR HOME AFFAIRS RAEDO empowers the SHA to discharge functions previously vested in the Commissioner of Inland Revenue ("CIR") under the EDO, i.e. the issue of various types of certificate and authorization (see below). To ensure a smooth transition, the CIR will retain these functions for about one year from 11 February 2006. FUNERAL EXPENSES AND MAINTENANCE OF HIS FORMER DEPENDANTS The SHA may issue a Certificate for Necessity of Release of Money for release of money from a bank account in the deceased’s sole name for funeral expenses, or to maintain any person who was a dependant of the deceased and appeared to have an interest in the deceased’s estate. Section 60B, PAO. This allows money that is urgently required to be released before the grant of probate or letters of administration. It does not apply to joint accounts, which may suggest that the legislature felt that surviving joint account holders were already entitled to the money. On presentation of the certificate and proof of identity, the bank is obliged, subject to conditions attached to such certificate, to pay the holder of the certificate the amount specified in such certificate from the deceased's account. INSPECTION OF SAFE DEPOSIT BOX The SHA may issue a Certificate for Necessity of Inspection of Bank Deposit Box to allow inspection of a safe deposit box in the sole name of the deceased or in joint names to help search for a will and/or so as to prepare an inventory of the contents of the deposit box. Section 60C, PAO. On presentation of the certificate and proof of identity, subject to any conditions attached to the certificate, a bank employee and public officers must witness the inspection and help prepare the inventory, if necessary. If a will is found in the box and the holder of the certificate is the/an executor named in the will, the bank must, subject to any conditions attached to such certificate, allow the holder to remove the will after a copy has been placed in the deposit box. However, if, upon inspection, the circumstances are otherwise, the bank employee must immediately make a copy of the will, place the original back in the box, close or seal it and give the copy to the public officers present. The SHA must keep the copy for 6 years. Section 60D, PAO generally. REMOVAL OF ITEMS FROM SAFE DEPOSIT BOX Where an inventory has been prepared, the SHA may issue an Authorization for Removal from Bank Deposit Box for the removal of a specified document or article from a deposit box in the sole name of the deceased or in joint names. Upon presentation of the authorization and sufficient proof of identity, subject to any conditions attached to the certificate, the bank should allow the holder to take the document or article specified in the authorization. Section 60E, PAO. PROTECTION OF BANK AND BANK STAFF If the bank employee acted in good faith and exercised due care in the procedures set out in the certificates/authorization notices, neither the bank nor such employee will incur civil liability. Section 60H, PAO. (Section 60I, PAO relates to criminal liability.) RIGHTS OF SURVIVING RENTER OF JOINTLY-OWNED DEPOSIT BOX A surviving renter of a jointly rented safe deposit box with a survivorship right to the box’s contents can only access the box in accordance with the provisions of the PAO (i) within the first 12 months after the co-renter’s death where an inventory of the box has been prepared under the PAO within 12 months after the co-renter’s death; and (ii) before preparation of the inventory, where no inventory has been prepared within 12 months of the co-renter’s death. FINAL COMMENT The new provisions are quite detailed and not particularly clear, so it is advisable for banks to obtain specific advice in individual cases.