Comparing the Tax Residence Tests for Trusts in Hong Kong and the United Kingdom

The decision in Hang Seng Bank v Commissioner of Inland Revenue (2023) 26 HKCFA 37, handed down in November 2023, fundamentally recast the common law test for trust residence in Hong Kong, creating a divergence from the UK’s statutory regime that now carries material consequences for family offices and cross-border estate planners. The Court of Final Appeal held that the residence of a trust is determined by the place where the central management and control of the trusteeship is exercised, not the physical location of the trust assets or the settlor’s domicile. This ruling arrived as the UK’s Finance Act 2022 introduced a deemed-domicile rule for long-term residents, effective 6 April 2025, which automatically subjects trusts with UK-resident settlors to inheritance tax on worldwide assets after 10 years of residence. For Hong Kong-based practitioners structuring trusts for PRC families or HNWIs with UK connections, the divergence between a pure “management-and-control” test and a statutory “settlor-domicile” test now dictates whether a trust structure achieves its intended tax neutrality or inadvertently triggers a GBP 40,000 annual inheritance tax charge on a GBP 20 million portfolio.

The Conceptual Foundation: Situs vs. Control

The tax residence of a trust is not an inherent attribute of the trust deed but a conclusion drawn from the factual exercise of powers by the trustees. In Hong Kong, the Inland Revenue Ordinance (Cap. 112) does not define “trust residence” explicitly; instead, the common law test, as articulated in Hang Seng Bank v CIR, requires an examination of where the trustees as a collective body make decisions binding on the trust fund. The UK, by contrast, operates under a hybrid regime: Section 475 of the Income Tax Act 2007 provides that a trust is UK-resident if all trustees are UK-resident, unless the settlor was non-UK-domiciled at the time of settlement and the trust is an “excluded property trust” under the Inheritance Tax Act 1984, Schedule A1.

Hong Kong: The Management-and-Control Test Post-2023

The Court of Final Appeal in Hang Seng Bank v CIR (2023) held that the residence of a trust follows the residence of the trustees only when those trustees exercise central management and control in Hong Kong. The case involved a trust whose assets were managed by a Hong Kong-based investment committee, while the trustees were incorporated in the Cayman Islands. The court found the trust to be Hong Kong-resident because the committee—not the Cayman entity—made all portfolio allocation decisions. This means that a trust with a Hong Kong-based protector or investment manager is now presumptively Hong Kong-resident for tax purposes, regardless of where the trustee entity is incorporated.

United Kingdom: The Statutory Regime and the Deemed-Domicile Rule

The UK applies a two-tier test. First, under Section 475 ITA 2007, a trust is UK-resident if the majority of trustees are UK-resident. Second, from 6 April 2025, the Finance Act 2022 deems any individual who has been UK-resident for 10 of the previous 20 tax years to be UK-domiciled. This deeming provision extends to trusts settled by such individuals: the trust becomes subject to inheritance tax on worldwide assets, not just UK-situated assets. For a trust settled in 2015 by a Hong Kong permanent resident who moved to London in 2020, the trust will become UK-domiciled for IHT purposes on 6 April 2025, triggering a 40% charge on the entire fund upon the settlor’s death.

The Settlor’s Role: A Critical Divergence

The identity and residence of the settlor determine the trust’s tax treatment in the UK but are largely irrelevant to the trust’s residence in Hong Kong. Under Hong Kong’s source-based taxation system, the Inland Revenue Ordinance (Cap. 112) taxes only income arising in or derived from Hong Kong. The residence of the settlor has no bearing on the trust’s liability. In the UK, however, the settlor’s domicile—or deemed domicile—dictates whether the trust is an “excluded property trust” and thus outside the IHT net.

Hong Kong: Settlor Residence Is Irrelevant

The Inland Revenue Department’s Departmental Interpretation and Practice Notes No. 46 (2019) confirms that a trust is not a separate taxable entity; rather, the trustees are assessed on trust income. The settlor’s residence status does not appear in any IRD guidance as a factor for determining the trust’s tax residence. A trust settled by a PRC citizen living in Shenzhen but administered from Hong Kong is Hong Kong-resident for tax purposes, provided the trustees exercise management and control in Hong Kong. This creates a planning opportunity: PRC families can settle trusts in Hong Kong without the settlor’s PRC tax residence contaminating the trust’s Hong Kong tax status.

United Kingdom: Settlor Domicile Determines IHT Exposure

The UK’s Finance Act 2022, Schedule 9, amends the Inheritance Tax Act 1984 to extend the deemed-domicile rule to trusts. From 6 April 2025, a trust settled by an individual who has been UK-resident for 10 of the previous 20 tax years is deemed UK-domiciled for IHT purposes, even if the trust is administered offshore. This means that a Hong Kong permanent resident who has lived in London for 12 years and settled a BVI trust in 2018 will see that trust become subject to UK IHT on its worldwide assets. The only escape is if the settlor exits the UK before reaching the 10-year threshold, but the clock resets only after 6 consecutive years of non-residence under the statutory residence test (Schedule 45, Finance Act 2013).

Trustee Location and Control: The Operational Test

The physical location of the trustees and the forum in which they exercise their fiduciary duties is the single most important factor in both jurisdictions, but the UK adds a statutory override for trustee residence. Hong Kong’s common law test is purely factual; the UK’s is partly statutory and partly factual.

Hong Kong: Trustee Location Is Determinative

The Hang Seng Bank ruling makes clear that the place where the trustees meet, deliberate, and make decisions is the trust’s residence. A trust with three trustees—one in Hong Kong, one in Singapore, and one in the Cayman Islands—will be Hong Kong-resident if the Hong Kong trustee convenes meetings and makes investment decisions, while the other two merely execute instructions. The IRD’s practice is to examine board minutes, email communications, and attendance records to determine where “real and substantive” control lies. For a trust to be non-Hong Kong-resident, all trustees must exercise their powers outside Hong Kong, and the trust’s assets must generate income outside Hong Kong.

United Kingdom: The Majority Rule with an Offshore Escape

Section 475 ITA 2007 provides that a trust is UK-resident if the majority of trustees are UK-resident. However, if the trust has a UK-resident settlor, the trust is treated as UK-resident regardless of trustee location, unless the trust is an “excluded property trust” under IHTA 1984, Schedule A1. This creates a trap: a trust with all trustees in Hong Kong but a UK-domiciled settlor is UK-resident for income tax and capital gains tax purposes. The only way to achieve non-UK residence is to ensure the settlor is non-UK-domiciled at the time of settlement and remains non-UK-domiciled, which is increasingly difficult after the 2025 deemed-domicile rule.

Practical Implications for Hong Kong Trust Structures

For a Hong Kong-based family office managing a trust for a PRC family, the divergence between the two regimes creates three distinct planning scenarios. First, if the family has no UK connections, the trust should be structured to maintain Hong Kong residence by ensuring all trustee meetings and investment decisions occur in Hong Kong. Second, if the family has a member who is or may become UK-resident, the trust should be settled before that member reaches 10 years of UK residence, and the settlor should be a non-UK-domiciled individual, such as a PRC citizen with no UK ties. Third, if the trust already has UK exposure, a review of the settlor’s UK residence history is urgent before 6 April 2025 to determine whether the trust will become deemed UK-domiciled.

Case Study: The PRC Family with a UK-Educated Child

Consider a PRC family that settles a Hong Kong trust in 2024 with a Hong Kong-based trustee and a BVI holding company for a GBP 5 million London property. The settlor is a PRC citizen with no UK residence history. The child moves to London for university in 2025 and becomes UK-resident. Under Hong Kong law, the trust remains Hong Kong-resident because the trustees exercise control in Hong Kong. Under UK law, the trust is not UK-resident because the settlor is non-UK-domiciled, and the child is a beneficiary, not a settlor. However, if the child later becomes a settlor by adding assets to the trust, the child’s UK residence would trigger the deemed-domicile rule after 10 years. The solution is to keep the child as a mere beneficiary and never as a settlor, and to ensure the trust deed prohibits the child from adding assets.

Case Study: The UK-Returning Expatriate

A Hong Kong permanent resident who lived in the UK from 2015 to 2025 and returned to Hong Kong in 2025 settled a trust in 2018 with a Cayman trustee and Hong Kong-based investment manager. Under Hong Kong law, the trust is Hong Kong-resident because the investment manager exercises control in Hong Kong. Under UK law, the trust is deemed UK-domiciled from 6 April 2025 because the settlor was UK-resident for 10 of the previous 20 tax years. The trust’s worldwide assets—including a GBP 10 million portfolio of Hong Kong equities and UK property—are now subject to UK IHT at 40%. The only remedy is to appoint a new settlor who is non-UK-domiciled, but this requires a complex restructuring that may trigger capital gains tax in the UK.

The 2025 Deadline and Compliance Obligations

The 6 April 2025 implementation date for the deemed-domicile rule creates a hard deadline for trust reviews. For trusts with UK-resident settlors, the following actions are required: (1) determine the settlor’s UK residence history using the statutory residence test (Schedule 45, Finance Act 2013); (2) calculate the number of UK-resident years in the previous 20 tax years; (3) if the settlor has been UK-resident for 10 or more years, assess the trust’s worldwide asset value and the potential IHT liability; (4) consider whether to restructure the trust to appoint a non-UK-domiciled settlor or to migrate the trust to a jurisdiction with a more favourable treaty network, such as Singapore or the Cayman Islands.

Reporting Obligations in Hong Kong

The IRD does not require trusts to report their residence status, but the trustees must file tax returns for trust income derived from Hong Kong. If the trust is Hong Kong-resident, all Hong Kong-source income is taxable at the standard 16.5% profits tax rate for corporations or the progressive rates for individuals. Non-Hong Kong-source income, such as dividends from a BVI company, is not taxable in Hong Kong. The Hang Seng Bank ruling has not changed this; it merely clarified that the trust’s residence follows control, not incorporation.

Reporting Obligations in the United Kingdom

HM Revenue & Customs requires trusts with UK-resident trustees or UK-source income to file an annual trust tax return (Form SA900). From 6 April 2025, trusts deemed UK-domiciled must also file an IHT account (Form IHT100) within 12 months of the settlor’s death. Failure to file carries a penalty of up to GBP 3,000 per year, plus interest on unpaid tax at 4.25% per annum (HMRC, 2024). For a trust with GBP 20 million in assets, the penalty for a 5-year non-filing period would be GBP 15,000, but the IHT liability on death would be GBP 8 million, making compliance a material financial risk.

Actionable Takeaways

1. Trusts with Hong Kong-based trustees exercising management and control are Hong Kong-resident for tax purposes, regardless of the settlor’s residence, but the UK’s deemed-domicile rule from 6 April 2025 overrides this for IHT purposes if the settlor has been UK-resident for 10 of the previous 20 tax years.
2. The Hang Seng Bank v CIR (2023) ruling means Hong Kong trusts must document all trustee meetings and investment decisions in Hong Kong to maintain non-UK residence status under the management-and-control test.
3. For PRC families with UK-educated children, the trust deed must prohibit beneficiaries from becoming settlors to avoid triggering the 10-year UK residence clock.
4. Any trust settled by a UK-resident individual before 6 April 2025 should be reviewed immediately to calculate the settlor’s UK residence years and assess potential IHT exposure on worldwide assets.
5. Restructuring a trust to replace a UK-domiciled settlor with a non-UK-domiciled settlor is possible but requires careful planning to avoid triggering UK capital gains tax on asset transfers.