Press Release

The abolition of estate duty which was announced by the Financial Secretary in his Budget Speech on 16 March 2005 will represent a significant change for Hong Kong. For the first time in almost 100 years there will now be only one tax on wealth, i.e. stamp duty. Stamp duty only applies to property leases, tenancy agreements and to documents effecting changes of ownership of Hong Kong stock (including units in HK unit trusts) and of Hong Kong real estate interests; and there are numerous exemptions to take advantage of.

Throughout the long period since estate duty was introduced in Hong Kong in 1915, estate duty considerations have imposed severe restraints on the manner in which, and the legal structures within which, Hong Kong situated assets have been held. The desire to avoid estate duty has also encouraged the relocation of portable wealth out of Hong Kong. With the abolition of estate duty, these constraints will disappear, leaving individuals and businesses free to structure asset ownership with a far greater degree of flexibility than in the past. Individuals will also be free to repatriate back to Hong Kong, wealth which has been placed offshore to avoid the duty. This should lead to increased investment in Hong Kong assets, including Hong Kong real estate.

Examples of some of the changes which we can expect are:
1. ownership of Hong Kong situated assets (including real estate) through companies will no longer suffer from the controlled company provisions of the Estate Duty Ordinance;
2. there will no longer be a need for complicated structures involving discretionary trusts and private unit trusts to avoid estate duty on holdings of Hong Kong real estate and listed company shares;
3. inter vivos discretionary trusts will no longer have a tax advantage over other forms of trust and other types of trust such as fixed interest trusts, life interest trusts and Will trusts will no longer suffer a tax disadvantage;
4. an individual will no longer have to survive for 3 years after making a gift of a valuable Hong Kong situated asset in order to escape estate Duty;
5. gifts with a reservation will be a thing of the past;
6. family settlements can be established free of estate duty considerations and letters of wishes will become redundant.

The repeal of this tax is an extremely welcome development for Hong Kong and one which should present opportunities to develop new ideas for asset ownership free of the artificial constraints which estate duty has imposed for so long.

Note: At the date of publication the requisite bill to enact this repeal is yet to be introduced and there is still uncertainty as to whether the repeal will be back dated to the date of announcement (16 March 2005) or whether the bill will set a new date.