Mrs Leung's Concentrated US Shareholding: Diversification, Withholding Tax and US Estate Exposure
Mrs Leung, 54, was widowed three years ago. Her late husband spent 20 years at a US-listed semiconductor company and she still holds 18,000 shares worth HKD 7.2 million - about 60% of her HKD 12 million portfolio. The remainder is a HKD-denominated bond fund of HKD 2.5 million (duration 6.5 years, yield 4.1%), HKD 1.8 million in MPF under the default investment strategy, and HKD 500,000 cash. The shares pay a dividend yield of 0.4%. She has no salary and needs HKD 40,000 a month to live on. She has promised her son HKD 6 million towards a flat purchase in 24 months. She is a Hong Kong permanent resident, not a US citizen or green card holder, and has never filed a US return. The share price fell 35% in 2022; she says she "cannot go through that again" but refuses to sell because "my husband believed in the company".
1. Quantify the portfolio's problems and propose a sequenced plan, including what must be done in the next three months.
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Three problems, in order of urgency.
Liquidity. She needs HKD 480,000 a year and has promised HKD 6 million in 24 months. Current portfolio income is roughly HKD 28,800 of dividends (7.2m at 0.4%) plus about HKD 102,500 from the bond fund - around HKD 131,000 against a HKD 480,000 need. The shortfall must come from capital, so the HKD 6 million promise has to be carved out first and held in HKD near-cash instruments matched to the 24-month date. Equities, and certainly a single volatile stock, are the wrong home for a dated liability.
Concentration. 60% in one company means her income, her capital and her late husband's legacy are one risk. The 2022 drawdown of 35% would have removed roughly HKD 2.5 million. A staged sale over 12–18 months, using pre-set price triggers rather than a single decision, reduces regret risk and manages the behavioural block she has described.
Tax cost of acting is close to zero. Hong Kong does not tax capital gains or dividends, so diversifying costs her nothing in local tax - a powerful point to make to a reluctant seller.
Next three months: move the HKD 6 million equivalent into short-dated HKD deposits or treasury bills; sell at least a quarter of the shares and reinvest into a diversified global equity fund; set a written schedule for the balance; and place the residual living-expense reserve in a laddered deposit.
2. She asks whether the US shares create any tax exposure beyond Hong Kong profits tax, and whether holding them through a Hong Kong company would help. Advise her.
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Yes, two exposures arise purely because the shares are US-situs assets.
Dividend withholding. The United States withholds 30% on dividends paid to a Hong Kong resident individual, because Hong Kong has no double tax treaty with the US. At a 0.4% yield on HKD 7.2 million, that is roughly HKD 28,800 gross and HKD 20,160 net - the tax is withheld at source and is not recoverable.
US estate tax. A non-US person who is not a US domiciliary gets an exemption of only USD 60,000 on US-situs assets, with rates rising to 40% on the excess. Her holding is far above that threshold, so a large part of HKD 7.2 million is exposed if she dies holding the shares, and there is no US–Hong Kong estate tax treaty to relieve it. Estate duty was abolished in Hong Kong in 2006, so this exposure is easy to miss.
On the company idea: holding the shares through a Hong Kong company can convert the estate's asset from US shares to shares in a Hong Kong company, which may remove the US estate exposure, but it introduces profits tax questions on the dividends received, annual audit and filing costs, and the foreign-sourced income exemption regime requires economic substance in Hong Kong. It also does nothing about the 30% withholding, which applies to the company as a foreign shareholder. My advice is that the simpler and more certain remedy is to reduce the holding itself as part of the diversification plan, and to keep any residual exposure modest rather than building a structure around it.
3. Design the income and drawdown plan for the next five years, explaining how you would sequence withdrawals.
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Build the plan in layers so that no market event forces a sale at the wrong time.
Layer 1 - the 24-month liability. HKD 6 million in HKD deposits or short-dated government paper maturing in 6, 12, 18 and 24 months. This money is not invested; it is earmarked.
Layer 2 - two years of living expenses. HKD 960,000 (24 months at HKD 40,000) in a laddered deposit and short-term bond allocation, so she never has to sell an equity fund in a falling market. Together with layer 1 this is roughly HKD 7 million, funded from the share sale.
Layer 3 - the long-term portfolio. The balance, after the staged sale of the shares, split between a diversified global equity fund and the existing bond fund, sized so the bond weight covers roughly five to seven years of drawdown. The bond fund's 6.5-year duration should be shortened or complemented with shorter maturities, because duration of that length is a real risk if yields rise while she is drawing capital.
Replenishment rule. Each year, refill layer 2 from layer 3 only when equity values are at or above the prior year-end, and otherwise draw from the bond allocation. Write the rule down so it is not renegotiated during a bad month. Also note the MPF cannot be touched before 65, so it should be counted as a late-life reserve, not as part of the drawdown pool.