Examining the New Tax Exemptions for Hong Kong Residents Who Relocate to the United Kingdom Under the BNO Route

Disclaimer: This article provides general information only and does not constitute legal or tax advice. You should consult a qualified solicitor or tax advisor for advice specific to your circumstances.

The United Kingdom’s 2025 Spring Budget introduced a fundamental shift in its tax regime for new residents. Effective 6 April 2025, the UK abolished the 226-year-old “remittance basis” of taxation for most new residents and replaced it with a residence-based system. For Hong Kong residents moving under the British National (Overseas) (BNO) route, this change creates both opportunities and new compliance obligations. The new rules mean that, for the first time in decades, all foreign income and gains arising after an individual becomes UK tax resident will be subject to UK tax, regardless of whether the money is brought into the UK. However, the legislation provides a transitional four-year exemption for new arrivals who have not been UK resident in the previous ten tax years. Understanding these provisions is critical for anyone planning a BNO relocation in 2025 or 2026.

The Four-Year Foreign Income and Gains Exemption

The cornerstone of the new regime is the “foreign income and gains” (FIG) exemption. This provision allows certain new UK residents to receive foreign income and gains tax-free for their first four years of UK tax residence.

Eligibility Criteria

The legislation, contained in Chapter 1 of Part 14 of the Income Tax Act 2007 (as amended by the Finance Act 2025), sets out a strict test. An individual qualifies for the FIG exemption only if they were not UK resident in any of the ten tax years immediately before the year of arrival. For a Hong Kong resident arriving in the UK in September 2025 and becoming tax resident from 6 April 2025, the relevant period is the ten tax years from 2015-16 to 2024-25. If the individual was UK resident in any part of that period, the exemption does not apply.

The exemption applies to:

• Foreign employment income: Salary, bonuses, and benefits from an employer who is not UK-resident.
• Foreign investment income: Dividends, interest, and rental income from overseas assets.
• Foreign gains: Capital gains from the disposal of overseas assets, including Hong Kong property, shares, or businesses.

What the Exemption Does Not Cover

The FIG exemption does not apply to income or gains arising in the UK. This includes:

• Income from a UK employer or from work performed physically in the UK.
• Gains on UK residential property, which have been subject to UK tax since 2015.
• Income from a UK business or trade.

The exemption also does not protect “mixed funds” – accounts containing both capital and income. HMRC’s guidance (HMRC Manuals, 2025) clarifies that where a foreign bank account holds both capital (which may be exempt) and interest income (which may be exempt under FIG), withdrawals are treated as coming first from income, then from capital. This ordering rule can erode the benefit of the exemption if not managed carefully.

Impact on Hong Kong Assets and Income Streams

Hong Kong residents relocating under the BNO route typically hold a range of assets that require specific planning under the new rules.

Hong Kong Property and Rental Income

Rental income from a Hong Kong property is foreign income. Under the FIG exemption, this income is not subject to UK tax for the first four years of UK residence. However, the UK does not have a double taxation agreement with Hong Kong that covers rental income in the same way as some other jurisdictions. The UK will tax this income after the four-year exemption period ends, unless the individual returns to Hong Kong or restructures their affairs.

A key practical point: mortgage interest on the Hong Kong property is not deductible against UK tax on rental income. The UK’s restriction on mortgage interest relief for residential landlords (introduced in 2017-2020) applies to all rental income, including foreign rental income. After the exemption period, the landlord will pay UK tax on the gross rental income, with only a basic-rate tax credit for mortgage interest.

Hong Kong Employment Income Before Departure

Income earned from Hong Kong employment before the date of UK arrival is not subject to UK tax. The UK taxes only income arising after an individual becomes UK resident. For a Hong Kong employee who resigns and moves to the UK in mid-2025, the final salary payment from their Hong Kong employer, paid after arrival, may fall into a grey area.

HMRC’s guidance (HMRC International Manual, INTM180030, updated 2025) states that employment income is treated as arising on the date the work was performed, not the date of payment. Therefore, salary for work done in Hong Kong before UK arrival is not UK taxable, even if paid after arrival. The individual should keep clear records of the period of work to which each payment relates.

Hong Kong Investment Portfolios

Dividends and capital gains from Hong Kong-listed shares, unit trusts, or ETFs are foreign income and gains. Under the FIG exemption, these are UK tax-free for the first four years. This is a significant benefit for Hong Kong residents with substantial investment portfolios who do not wish to sell assets before moving.

The exemption does not apply to gains crystallised after the four-year period. An individual who holds onto Hong Kong shares for more than four years after becoming UK resident will face UK capital gains tax on the entire gain (from the original purchase price to the sale price) when they eventually sell. This means there is a strong incentive to sell assets within the four-year window or to consider a “bed and breakfast” sale (though anti-avoidance rules apply).

Practical Planning Steps for BNO Route Applicants

The window for action is narrow. The FIG exemption applies only to the first four tax years of UK residence. After that, worldwide income and gains are fully taxable.

Step 1: Establish Your UK Tax Residence Date

The UK statutory residence test (SRT) determines the exact date UK residence begins. For most BNO route arrivals, residence starts on the day they arrive in the UK with the intention to live there. However, the SRT has complex rules for “tie-breaker” years. An individual who spends significant time in the UK before the formal move may inadvertently trigger UK residence earlier than planned.

The SRT counts days spent in the UK. Days of arrival and departure are generally not counted, but there are exceptions. An individual who arrives in the UK for a house-hunting trip in March 2025 and stays for 15 days will not trigger residence for 2024-25, but the clock starts ticking for the 2025-26 year from 6 April 2025.

Step 2: Segregate Capital and Income Before Arrival

The FIG exemption works best when an individual can clearly identify which assets and income streams are foreign. Before arrival, the individual should:

• Open a separate UK bank account for UK income and expenses.
• Keep Hong Kong bank accounts and investment accounts separate from UK accounts.
• Document the capital value of all overseas assets as at the date of UK arrival. This “step-up” in base cost is not provided for by UK legislation, but it is crucial for calculating future gains.

Step 3: Plan for the Post-Exemption Period

The FIG exemption is time-limited. After four years, all foreign income and gains become taxable. The individual should consider:

• Selling Hong Kong investment assets within the four-year window to crystallise gains tax-free.
• Restructuring Hong Kong rental property ownership into a corporate structure or a trust (though this has its own UK tax implications).
• Returning to Hong Kong before the four-year period ends to reset the “ten-year non-residence” clock for any future UK return.

Interaction with Hong Kong’s Territorial Tax System

Hong Kong operates a territorial tax system. Only income arising in or derived from Hong Kong is subject to Hong Kong profits tax, salaries tax, or property tax. Income from outside Hong Kong is generally not taxed in Hong Kong.

No Double Taxation Relief

Because Hong Kong does not tax foreign income, a Hong Kong resident moving to the UK cannot claim double taxation relief in the UK for Hong Kong tax paid on foreign income. The UK’s unilateral relief provisions (Section 18, Taxation (International and Other Provisions) Act 2010) only apply where the foreign tax is “under the law of a territory outside the United Kingdom.” Since Hong Kong does not tax the foreign income of its residents, no relief is available.

This means that during the FIG exemption period, the individual pays no tax on foreign income in either jurisdiction. After the exemption period, the individual pays UK tax on foreign income, with no credit for Hong Kong tax (because none is payable).

Hong Kong Salaries Tax on Pre-Departure Income

Hong Kong salaries tax is chargeable on income arising in or derived from Hong Kong. An individual who works in Hong Kong before departure is liable to Hong Kong salaries tax on that income, regardless of when it is paid. The UK does not tax that income (see above). There is no overlap.

The individual should file a Hong Kong tax return for the year of departure, declaring all income up to the date of cessation of Hong Kong employment. The Inland Revenue Department (IRD) will issue a final assessment. No further Hong Kong tax liability arises after departure, unless the individual derives Hong Kong-sourced income (e.g., rental income from Hong Kong property, which is subject to Hong Kong property tax).

Actionable Takeaways

1. The four-year FIG exemption applies only if you were not UK resident in any of the ten tax years before your arrival; check your UK travel history carefully.
2. Rental income from Hong Kong property is foreign income and is exempt for four years, but mortgage interest is not deductible after that period.
3. Sell Hong Kong investment assets within the four-year window to crystallise gains tax-free under the FIG exemption.
4. Segregate your Hong Kong and UK bank accounts before arrival to simplify the tracking of foreign income and capital.
5. No double taxation relief is available between Hong Kong and the UK for foreign income, so the FIG exemption is your only protection from UK tax on Hong Kong assets.