Back in 2017, the Mayor of London commissioned a piece of research which showed that the London residential new-build property market is dominated by Asian investors.
According to data from the Office of National Statistics and the Centre for Housing Policy in the UK, an estimated 1 billion pounds (US$1.29 billion) was invested in the London new-build property market alone in 2017 from Asian investors, predominantly based in Hong Kong and Singapore. Asia accounted for 61.4% of total overseas sales, with Hong Kong and Singapore the top two regions by far. When broken down, 31.5% came from Hong Kong, 20.8% from Singapore, 5.4% from China, and 3.7% from Malaysia.
This trend has continued. Amid the coronavirus pandemic, interest in London prime luxury property from Hong Kong and mainland Chinese investors has skyrocketed. According to data compiled by London estate agency Beauchamp Estates, Hong Kong and mainland Chinese investors now account for 15% of international buyer home sales above 1 million pounds across prime central London and 20% of all deals above 10 million pounds. Following news that the UK government is going to offer a route to full British citizenship for British National (Overseas) passport holders in Hong Kong, these figures could climb even higher.
However, these investors may be unknowingly left exposed to a UK inheritance tax (IHT) liability. IHT is payable on death on any property or assets owned in the UK by the deceased. This is irrespective of domicile status or whether the deceased lived in the UK or overseas. It’s also important to remember that IHT applies to all investible assets, not just on property. Due to the long-standing relationship between the UK and Hong Kong, many investors may have bought UK property, but if they choose to claim citizenship, they will transfer more offshore assets to the UK, too.
Asian high net worth individuals (HNWIs) from all regions buying these properties are typically globally mobile and act according to their immediate needs, whether those have to do with changing political dynamics, new investment opportunities or family members choosing to educate themselves in places like Britain.
However, it is key that these investors carefully plan not just for their immediate needs but those of their families in the future. One of the key questions they should be asking themselves is do they know the tax liability or impact of IHT in the event they die? UK IHT, for example, is set at an eye-watering 40% so proper planning is needed.
This planning should be undertaken as a family to make sure that inheritors know what they can stand to inherit and plan accordingly so that they have enough liquidity to pay the IHT due. Our own research of over 100 HNWIs from Hong Kong and Singapore found that the majority of inheritors (66%) want to understand their family’s wealth transfer plan and 62% are interested in finding out more about the financial products available, which could help them plan for this wealth transfer.
However, the research also shows that at present HNWIs are reluctant to share these transfer plans with their families. In fact, the majority (64%) didn’t want to share their wealth transfer plans as they believed those receiving are not old enough with the other 36% saying it would affect family harmony.
With this potential IHT exposure looming over these inheritors, it is critical that wealth transfer plans are discussed. At present just 16% of those receiving wealth said that they were made aware of the potential impact that a wealth transfer plan may have on them and their family.
Moving on to the actual plan itself, a surprising 50% of all age groups who responded to our research use a will as part of their wealth transfer strategy. There is a market perception that a will is a sufficiently nuanced tool for estate planning but this view doesn’t recognise that wills are public documents and require probate in each jurisdiction that they own assets. Understandably, these types of individuals are typically private, and the public nature of a will can mean complex family arrangements coming to the fore. Similarly, probate can be a particularly lengthy process for HNWIs who hold different assets across the world.
While it should be said that wills are important wealth transfer tools, they are by no means the only option. Other options now gaining in popularity in Asia are Private Placement Life Insurance (PPLI) and Variable Universal Life (VUL). Both allow the policyholders to retain control, assign beneficiaries, maintain privacy, avoid probate, and proceeds can be passed on quickly. Importantly, PPLI would provide access to liquidity (policy assets) with limited death benefit, to pay for any IHT incurred while VUL would also provide extra liquidity to cover the IHT. Both help the beneficiary avoid being financially impacted while they wait for probate to complete.
This kind of estate planning must start with a conversation with the whole family and that can be supported by a professional adviser. Wealth transfer plans should not be seen as a taboo topic, but something to be discussed openly. Without doing so investors in assets such as high-end London property could leave their inheritors with hefty unplanned tax bills they were not expecting.
Mark Christal is Hong Kong CEO and head of NE Asia region at Quilter International