Taxation & Tax Planning: Conditional Estate Duty Model

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The report delves into different potential tax bases proposed, with the criteria of operational framework, rationale for implementation, and expected results and impact. We further conducts in-depth comparison of the potential tax bases to finalize the most suitable option for Hong Kong’s existing situation. The chosen tax base is then justified with referencing tax policies from foreign jurisdictions and possible challenges and respective solutions. An implementation timeline is drafted for reference to ensure alignment of the strategic objectives.

We believe the Conditional Estate Duty tax model not only serves the purpose of direct government revenue, also creates synergy for economic opportunities.

Introduction

Hong Kong has been facing significant fiscal deficit from several consecutive years of economic downturn, since the social unrest and COVID-19 pandemic. The Hong Kong Government needs turning the fiscal deciding into profit.

Thus, the Hong Kong Government should consider developing a new tax base, that generates additional tax revenue while limits public resentment. A new tax base should not only generates direct tax income for the government, also creates economic benefits plus injects energy to the Hong Kong economy, to ensure a sustainable future growth.

Compared to other jurisdictions, Hong Kong has always been regarded as a low-tax region and zero government interference to the market. The tax-free status contributes to the financial hub recognition of the city. Therefore, the group wishes to introduce a tax base that does not directly implement tax liabilities on citizens, ensuring the low-tax status of Hong Kong, meanwhile strengthening the Government’s fiscal reserve.

The report explores different proposed tax base and conducts comparison to summarize the most feasible and effective option for the current situation. Additionally, the finalized proposed tax base is referenced by existing tax policy from other jurisdictions, to ensure the feasibility of such tax base. The foreseeable challenges are also addressed within the report with corresponding solutions.

Comparative Analysis of Potential New Tax Bases

-Goods and Services Tax (GST) Model-

Good and Services Tax as known as ‘Value-Added Tax’, which is a consumption tax levied on the end consumer and not on income earned. Unlike a simple sales tax applied only at the final sale, GST is collected at each stage of the chain of production and distribution. Each registered business in the process charges GST on its sales but can claim a credit for the GST it paid on its own purchase. This multi-stage collection system can ensure total tax is levied on the final consumption value, making GST an efficient, administrable and transparent which widely used by governments worldwide.

Operational Framework

Tax rate: A low rate proposed at 3-5%. By following Singapore’s GST model of starting low (3% in 1994, currently at 9%) to allow for public adapt. It significantly lower than the rates in United Kingdom (10% in 1973, currently at 20%).

Tax base: Essential items can be exempt from GST, and businesses can claim a full refund for all the GST it paid on its inputs. Zero GST rated ensuring the lowest possible prices for

consumers and protecting poor suffering extra expenses on GST. Example include: educational services, medical and healthcare services: veterinary clinic services, healthcare by clinics or paramedics, ambulance services, etc. are exempted; basic foods: e.g. fresh fruits, vegetables, milk and meat are zero-rated.

Registration threshold: A high registration threshold for businesses to exempt small and medium enterprises. 12-month taxable turnover more than HK$1,000,000 must register for GST. This threshold is used in the UK to reduce financial burden on SMEs.

Compensation measures: GST Voucher scheme: Hong Kong can imitate Singapore’s government by introducing GST Voucher scheme, this scheme helps lower-and-middle income households in Hong Kong. Voucher scheme can cover partial expenses in GST to reduce financial strain. Each household can choose cash for immediate financial needs, health care voucher for healthcare costs, and electricity charges subsidy scheme to help with utilities expenses.

Rationale for Implementation

A progressive salary tax structure ensures that the tax burden falls disproportionately on top earners, resulting in a low effective tax rate for the vast majority. Hong Kong’s fiscal structure relies on a limited number of revenue sources. The introduction of a GST is supported by the following rationale:

Broadening the tax base

The primary reason for introducing GST is to shift the tax base to final consumption. This ensures everyone who spends in Hong Kong contributes to government revenue, including tourists, non-taxpaying residents and citizens. Currently, Hong Kong’s tax base is excessively narrow, with a very small group of people carrying tax burden. According to the Government of the Hong Kong Special Administrative Region (2000), only 37% of our total working population were required to pay salaries tax in 2000. A GST would reduce the dependence on a small group of taxpayers and volatile asset markets, creating a broader and more resilient foundation for public finances.

Enhancing fiscal sustainability and stability

A GST provides a stable and predictable revenue stream compared to the existing major sources of income. According to the Inland Revenue Department (2006), it mentioned that although personal consumption generally declines during economic downturns, its volatility is lower than real estate, business profit and salary income. To address the budgetary uncertainty caused by fluctuating revenue from a volatile economy, the government can adopt consumption-based taxes. Therefore, GST can provide a more reliable revenue source, enhancing fiscal stability and enabling more effective long-term planning.

The introduction of a GST would modernize Hong Kong’s tax system to align with international standards. Over 170 countries have implemented VAT or GST, these approaches considered as global standards for generating stable income. The single largest source of tax revenue in Mainland China is the value-added tax (VAT) introduced in 2016 to replace the business tax. The GST system is capable of generating substantial tax revenue.

Furthermore, this shift enhances fairness by broadening the tax base to a wider range of economic participants. GST ensures everyone who consumes goods and services must share the responsibility of funding the government. This creates a more equitable system and ensures the tax burden is distributed more evenly across society.

Promoting fairness and aligning with international norms

Expected Result and Impact

Enhanced revenue stability during economic shifts

A GST offers a more stable revenue source by tapping into private consumption, which is less volatile than profits or asset values. This measure is specifically designed to resolve the structural budget shortfall. Based on the government’s scenario analysis, a 3% GST is projected to generate additional revenue equivalent to 1.5% of GDP. (FSTB, 2016) This measures would reduce the reliance on unpredictable revenue from land premiums and stamp duties, creating a predictable income stream for better long-term financial planning.

Addressing the structural nature of fiscal shortfalls

Hong Kong’s projected HK$67 billion deficit for 2025-26 follows several years of shortfalls, indicating a structural fiscal challenge beyond temporary economic cycles. (Government of the Hong Kong Special Administrative Region of the People's Republic of China, 2025) GST would provide a resilient revenue stream that grows with the economy and remains stable despite demographic shifts like an aging population, directly addressing this core fiscal weakness.

Potential impact on economic competitiveness and inflation

Introducing a GST would immediately increase the general price level for goods and services. In the short term, it would raise both the cost of living for household and business operating costs, that would reduce purchasing power. Consequently, Hong Kong could experience a short-term decline in local consumption and loss of competitiveness for its service sector.

-Wealth Tax Model-

Wealth tax, an annual levy on an individual’s total net assets – property, investments, cash, even antiques or art – above a given threshold. The idea is to directly target accumulated wealth, not just income. Unlike income tax, which taxes the flow of earnings, a wealth tax targets the existing reservoir of capital. Wealth tax often involves excluding an individual's liabilities, such as mortgages and other debts, from their total assets. Accordingly, this type of taxation is often referred to as a net wealth tax. In 2024, among Organisation for Economic Co-operation and Development (OECD) countries, only four currently impose wealth tax: Colombia, Norway, Spain, and Switzerland (Enache, 2024).

Operational Framework

Target taxpayers: Ultra-high-net-worth individuals (UHNWIs), defined as those with a net worth of at least US$30 million (about HK$233 million). Hong Kong has 17215 UHNWIs in the first half of 2025 (Brinsullivan, 2025).

Threshold: HK$230 million, this can ensure wealth tax targets the ultra-wealthy, insulation the vast majority of the population.

Tax rate: 0.5% on net wealth between HK$230 million and HK$1 billion. 1% on net wealth above HK$1 billion. A low, progressive rate would be prudent for a new tax.

Tax base: including the total value of personal assets

o Financial assets: bank deposits, listed stocks, bonds

o Real estate: aggregate value of residential and commercial properties, minus liabilities

o Business interests: ownership stakes in privately held companies

o Luxury assets: high-value items subject to practical valuation limits

Exemptions and deductions: To mitigate negative effects on business and investment, certain exemptions and deductions would likely be necessary.

o Primary residences: the primary residence will be exempt, preventing negative impacts on homeownership for taxpayers

o Retirement savings: assets held in retirement account (MPF) will be exempt from wealth tax to encourage long-term savings

o Business assets: Wealth tied up in family-owned businesses or investments in startups will be exempt to prevent capital flight or disincentivize entrepreneurial activities

Valuation mechanism:

o Tax return: taxpayers declare their net worth

o Third-party verification: leveraging data from banks, the Land Registry, and the Hong Kong Stock Exchange for automated cross-checking

Rationale for Implementation

Wealth inequality

The Gini coefficient (post-tax post-social transfer) of Hong Kong in 2021 is 0.397 (Census and Statistics Department, 2023). This shows an uneven distribution of wealth. A significant portion of Hong Kong's wealth is concentrated in the hands of a small group of UHNWIs. They own multiple properties, significant shares of companies, and other high-value assets, generating unearned income through rents, dividends, and capital gains, which perpetuates inequality across generations. A wealth tax can directly address this core dynamic. By targeting the wealthiest individuals, a wealth tax can reduce disparities and create a more progressive tax system. By using the collected tax revenue to improve public services, education, healthcare, and social security, wealth can be directly redistributed, narrowing the income gap and enhancing social cohesion.

Lack of resources for government revenue

Recent fiscal deficits in Hong Kong reveal the vulnerability of relying on traditional revenue sources. Hong Kong’s public finances have relied heavily on income tax, stamp duty, investment income, and land premium. Land premiums and Stamp duty constituted over 25% of government revenues in April to September of 2025 (Legislative Council Secretariat, 2025). Based on the cyclical nature of Hong Kong’s real estate market, public revenues derived from land sales or property-related taxes can be volatile. Also, this revenue evaporates during downturns, creating massive fiscal deficits and constraining government action precisely. Profit tax is similarly vulnerable to economic cycles. Faced with long-term structural problems such as an aging population, rising healthcare demands, and increased social welfare spending, the government's fiscal pressure will only intensify. The existing revenue structure is insufficient to cope with these ever-increasing rigid expenditures, necessitating the development of new revenue sources. While asset values fluctuate, the base of taxable wealth does not disappear overnight. A wealth tax would provide a more stable and diversified source of revenues, and help the government navigate economic downturns without relying on volatile sectors.

As global attention to wealth redistribution intensifies, many developed countries have implemented or are exploring wealth tax policies, such as Norway, Spain, Switzerland, and so on. They have achieved some degree of wealth redistribution (Enache, 2024). Hong Kong, as an international financial center, also needs to follow this global trend to improve its social structure and enhance its international image. This move will not only promote social equity but also demonstrate Hong Kong's commitment to taking on greater responsibility in global wealth distribution.

International Trends

Expected Result and Impact

Social Equity

Through targeted wealth taxation and reinvestment in public services, the absolute and relative values of income inequality can be effectively reduced, allowing the fruits of economic development to benefit all levels of society more broadly. For low-income groups, the introduction of a wealth tax will help improve their quality of life through increased social welfare programs. The redistribution of wealth in society can benefit more people, thereby reducing social conflicts and enhancing overall social stability. Even though it is theoretically a tax only for the rich, all social classes, including the poorest, would be affected by the wealth tax due to the reduction in economic activity. In monetary terms, people in the highest income percentiles would see their after-tax incomes reduced. Similarly, those in the lower percentiles would also see their incomes fall. A wealth tax may have the cost of making everyone poorer and fail to achieve the expected goal of wealth redistribution.

Economic Growth

The wealth tax is expected to generate billions to tens of billions of Hong Kong dollars in stable revenue for the government annually, effectively alleviating fiscal deficit pressures. For low-income groups, the introduction of a wealth tax will help improve their quality of life through increased social welfare programs. A wealth tax may encourage wealthy families and businesses to invest more in areas with social value, such as innovative technology and sustainable development, which will help improve Hong Kong's industrial competitiveness and lay the foundation for future economic growth. The wealthy may use various tax avoidance methods, such as capital outflow or asset restructuring, to reduce their tax burden. It may lead UHNWIs to relocate their assets and families to regions with lighter tax burdens. For example, if they perceive the tax burden as too heavy and uncompetitive, they may choose to leave, taking their knowledge, skills, and business networks with them. It causes long-term damage to local economic vitality. Thus, that can directly impact Hong Kong's status as an international wealth management center. This may weaken the effectiveness of the wealth tax.

Implementation complexity & Compliance costs

Valuing the total personal assets is complex and difficult. It may require a large and professional valuation system and incur high administrative costs. Taxpayers may evade taxes through complex trust structures, offshore companies, or by distributing assets under the names of relatives. Thus, the government needs to invest significant resources in regulation and auditing. It may need enormous execution expenses in order to maintain the exactness.

Business

With the imposition of a wealth tax, businesses may place greater emphasis on long-term social responsibility and sustainable development, which will positively impact brand value and social image. Furthermore, businesses may invest more capital in innovation, technological research and development, and infrastructure construction. Wealth tax potentially reduces the rate of return on investment and thus affects the willingness of local and foreign investors to make long-term investments in Hong Kong. It may lead to capital outflows and weaken Hong Kong's attractiveness as a financial center. Some large enterprises may consider relocating their capital and operations to tax-advantaged regions, which could affect Hong Kong's economic vitality and corporate competitiveness. High taxes may inhibit their expansion and investment intentions.

-Conditional Estate Duty Model-

Estate Duty, often referred as “Inheritance Tax” or “Death Tax”, is a tax base charged on the transfer of a deceased person to beneficiaries (Kagan, 2003). Hong Kong introduced Estate Duty in 1915 with the Estate Duty Ordinance (Cap.111), modeled on the UK’s estate duty system, and later abolished in February 2006.

The Conditional Estate Duty (CED) Model is an integrated tax policy with the focus of creating economic opportunities, instead of directly imposing a redistributive tax. The model is expected to attract capital, stimulate investment, and achieve fiscal objectives simultaneously.

Operational Framework

(1) Exemption for Middle Class or Below

The CED model is not aimed at imposing a regular tax base, yet to turn a potential tax burden to a powerful incentive. To defuse the “death tax” criticism, the model will be levied on the net value of a deceased’s estate exceeding a certain amount of threshold, tentatively set at HK$30 million. According to UBS Global Wealth Report 2025, Hong Kong account for 0.8% of global personal wealth, while the average wealth per adult of Hong Kong reaches HK$4.719 million. Thus, the model exempts the majority of middle class or below citizens.

(2) Exemption for HNWIs/UHNWIs with Investment Requirements

An Estate Duty exemption differentiates Hong Kong from regions with Estate Duty, therefore draws monetary and human capital from other economies, especially high-net-worth-individuals (HNWIs) and ultra-high-net-worth-individuals (UHNWIs). The CED model reckons the emphasis of family office sector by the Hong Kong Government in recent years; the model recognizes the economic transformation of Hong Kong. HNWIs and UHNWIs are ensured to receive 100% exemption by fulfilling either requirement:

Invest 70% of entire estate into a newly established or an existing family office for 7 consecutive years prior to death with a minimum of 3 full-time qualified

professionals working in Hong Kong; OR Invest 30% of total estate into government-approved “Hong Kong Strategic Investment Fund List” for a minimum of 5 years. The qualifying investments are restricted to productive sector, e.g., innovation, green infrastructure, and SME funds. (Property market investments are prohibited to avoid inflation of housing market.)

Rationale for Implementation

Solution to Public Resentment and Criticism of New Tax Base

Considering the pessimistic economic and social environment of Hong Kong currently, taxpayers are undoubtedly reluctant to new tax bases that reduce their disposable income. With the exemption for middle class or below, i.e., majority of taxpayers, CED eases public resentment. Thus, CED generates job opportunities for wealth management and relevant sector and brings in foreign capital to enhance market dynamics.

Solution to Contradiction with Previous Abolishment

The proposed CED model is not a return to the previous Estate Duty system. The Hong Kong Government abolished Estate Duty in 2006 to enhance Hong Kong’s competitiveness as an international finance center by attracting foreign capital to a lower tax region. It is commonly criticized whether the introduction of Estate Duty may potentially “scare off” investors. Yet, considering the changing global business environment, the low-tax feature of Hong Kong is no longer attractive to worldwide investors. With the well-developed financial foundation of Hong Kong, the CED model further creates a “tax-friendly” city that fosters the asset management sector by attracting HNWIs to reside in Hong Kong. Nonetheless, introducing the CED model indicates that Hong Kong guaranteed a tax exemption for Estate Duty, favorable to the majority of citizens and foreign investors, unlike other regions potentially imposing Estate Duty in the future.

The generational wealth created by the baby boomer generation are expected to be passed on to Gen X and Millennials in the foreseeable future. With a guaranteed exemption from Estate Duty provided by the CED model, Hong Kong proactively attracts the foreseeable vast intergenerational wealth transfer of HNWIs and UHNWIs. Foreign investors and HNWIs are foreseen to feel more secured from Hong Kong’s tax system, compared to other regions. In comparison, Singapore does not currently implement Estate Duty, yet Hong Kong announcing a tax exemption in advance can surely take the lead of the future “Great Generational Transfer”. With the solid financial foundation of Hong Kong’s economy, the CED model should create synergy for the future wealth transfer.

Vast and Growing Expected Wealth Transfer over the next 20 to 30 years

About us

The CED model is forecasted to generate revenue by stimulating Hong Kong’s wealth management global leading position, rather than receiving direct tax income from taxpayers. The intergenerational wealth transfer is impactful to the global economy in the foreseeable future. According to Shaban (2024), over 1.2 million HNWIs and UHNWIs are expected to collectively pass on US$31 trillion over the next 10 years. With the CED model, Hong Kong will be able to create a world-leading and unique proposition. As mentioned, with a guaranteed Estate Duty exemption, Hong Kong provides estate successor an alternative option to save on tax expenses and maximize the value.

In terms of the direct tax income, a modest annual stream of HK$1-2 billion is projected from estates that do not utilize the exemption pathways. The stream provides a stable and recurrent revenue source from a new tax base for the Hong Kong Government.

In terms of the indirect tax income, the indirect fiscal and economic benefits are projected to be massive from: (1) increased profits tax and salaries tax from operations of family offices and related companies; (2) job creation in finance, legal, and compliance sector; and (3) boost in productive capital for Hong Kong’s strategic sectors enhancing the long-term economic resilience and diversification. The actual amount of economic benefits created cannot be accurately estimated, as numerous factors are to be considered to allocate.

Proposed Framework: Conditional Estate Duty

Comparing all three taxes in terms of sustainability, economic beneficial and profitability, the Conditional Estate Duty is expected to perform the best to generate fiscal profit and economic benefit in the current and future.

Justification: Comparative Evaluation of Analyzed Options

-Comparison with Goods and Services Tax-

(1) Sustainability

The profit generated from Goods and Services tax is sustainable as it is inevitable that people will consume goods and services. However, people may choose to purchase less after everything is taxable so that Goods and services tax cannot maintain a high profit through all the time. On the other hands, Conditional Estate Duty is more sustainable compared to Goods and services tax since inheritance must exist so that people must pay tax and the profit of Conditional Estate Duty will be stable and at a high rate.

(2) Economic beneficial

Hong Kong as a place which is known for its low taxes and attract people abroad to consume in Hong Kong. The introduction of Good and Services Tax may badly hit the travel industry

and hence the economy. Local people may also choose to consume less to pay less tax. However, the Conditional Estate Duty will benefit the economy of Hong Kong by forcing inheritance holders to make investment. Therefore, the introduction of Conditional Estate Duty must generate economic benefit.

(3) Profitability

Although the profitability of Conditional Estate Duty may not result a high profit, the cost of introducing the tax is low as the calculation of deduction is simple and the data can be contained easily. However, Goods and Services tax involved many tax deductions, and the implement of GST voucher scheme is complex since the vouchers covered different categories of expenses. Therefore, the profitability of Goods and Services may be low after considering all the costs it takes.

-Comparison with Wealth Tax-

(1) Sustainability

The tax base of Wealth Tax includes real estate, financial assets, etc. Since it is difficult for taxpayers to sell their personal assets immediately, the collection of tax will be stable. However, taxpayers may avoid paying tax by buying less luxury and financial assets etc. which the government cannot maintain a high tax revenue from Wealth Tax substantially. On the other hand, Conditional Estate Duty will be more stable since inheritance must exist so that the tax revenue generated from Conditional Estate Duty is guaranteed and sustained.

(2) Economic beneficial

Since Wealth Tax will charge UHNWIs’ financial assets, luxury assets, business interest and real estate, taxpayers may buy less assets or relocate their assets to avoid paying high tax. Therefore, it cannot encourage people using their wealth to benefit Hong Kong economy compared to Conditional Estate Duty. As this tax forces people to choose between paying tax or investing in the local economy, it must benefit the economy no matter which option for the taxpayers choose.

(3) Profitability

As mentioned, there are 17215 UHNWIs in Hong Kong which there will be at least 19 billion tax revenue received from Wealth Tax which is much more profitable than Conditional Estate Duty. Since there are many exemptions under Conditional Estate Duty, like middle-class exemption and HNWIS/UHNWIs exemption with investment requirements. Therefore, Conditional Estate Duty is less profitable.

Foreseeable Challenges and Proposed Solutions

Increase in administrative and compliance burdens on the IRD

Verifying eligibility for the exemption on HNWIs and UHNWIs increases the administrative and compliance burden on the IRD due to the strict requirements. No matter in measuring or monitoring 70% investment into family offices for 7 years with 3 full-time professionals, and 30% into government-approved “Hong Kong Strategic Investment Funds List, both require extensive audits and complex recognition processes, thus creating additional burdens on the administrative and compliance department in the IRD.

To mitigate these burdens, it is suggested to utilize modern technology efficiently. For example, develop a digital compliance portal which could manage and track the investment amount of individuals in the family office automatically, ensuring that exemption requirements are met. The portal also simplifies the preparation work for auditors by centralizing critical documents and maintaining detailed records. It is believed that with the leverage of advanced technology, not only burdens on administrative and compliance could be reduced, but also time and management costs.

Rise of “Shell” family offices to evade tax

The investment requirements on the exemption for HNWIs and UHNWIs raise their incentive to set up minimal, non-functional “Shell” family offices with the minimum requirement of 3 full-time professionals, aiming to fulfill the exemption criteria but with no economic activities and business operations.

To prevent this problem, the IRD should monitor and review the business of established family offices by conducting "Substance Over Form” tests annually to ensure that they are operating and functioning properly. For instance, require family offices to provide evidence and documents showing their physical presence and decision-making authority. Besides, 3 full-time professionals should be strictly defined to prevent the only existence of nominal employees with administrative or clerical titles in family offices, which is not enough to prove the genuine economic activities. The exemption should be an attractive incentive for HNWIs and UHNWIs to invest and immigrate in Hong Kong, yet the IRD should prevent turning this favorable condition into a grey area for them to evade tax.

One of the exemption requirements is to invest 30% of total estate into government-approved “Hong Kong Strategic Investment Fund list” with the restriction to the productive sector, which may create capital flooding since HNWIs and UHNWIs may be willing to overpay for an asset to get 100% tax exemption. Therefore, the increase in valuation is due to investors’ incentive to secure tax exemption but not companies’ projected revenues or growth potential. Under a narrow list of approved funds, the problem of asset bubbles within designated sectors arises.

To solve this issue, the “Hong Kong Strategic Investment Fund list” should be broadened. The supply of eligible investments should be increased to diversify risk. In addition, regular

adjustment of the fund list is recommended. Eligible sectors should be reviewed and adjusted regularly to prevent over-concentration and continuous capital injections in specific sectors. This could balance the increase in capital in different sectors and hence avoiding the risk of

asset bubbles emerging in one fixed sector.

Creating asset bubbles in government-approved productive sector

Conclusion

Hong Kong, facing structural fiscal deficits, demands an innovative tax base. The above analysis demonstrates that traditional and conventional tax solutions, i.e., Goods and Services Tax or Wealth Tax, present political and economic challenges while imposing direct tax liabilities onto the Hong Kong citizens, increase their existing burden during economic downturn.

The proposed Conditional Estate Duty model emerges as the most viable solution. The policy is designed to inject energy to Hong Kong’s economy. By learning from the proven successes of the UK’s Business Relief and Singapore’s Fund Tax Incentives Scheme for Family Offices, the CED framework is expected to implement respective measures to strengthen the policy.

Overall, the introduction of the Conditional Estate Duty is a leap forward for Hong Kong. The policy offers a clear and sustainable path to the issue of continuous fiscal deficits and pessimistic economy. Nonetheless, the model is preparing Hong Kong for a future wave of capital passed on by Generation X.