Claiming VHIS Deduction for Children: Is It Better to Split Policies?

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The 2025-2026 tax year marks a critical inflection point for Hong Kong families utilising Voluntary Health Insurance Scheme (VHIS) policies for tax deduction purposes. With the Inland Revenue Department (IRD) increasingly scrutinising claims under Section 26D of the Inland Revenue Ordinance (Cap. 112), a specific question has emerged: is it more advantageous to take out a single VHIS policy covering multiple children, or to split policies with each child as the sole insured? The distinction is not merely administrative. The IRD’s 2024-25 tax return guide (Form BIR60) explicitly notes that the deduction limit of HKD 8,000 per policy per year applies on a per-insured-person basis, not per taxpayer. This creates a material arithmetic opportunity. A family with two children, for example, could claim up to HKD 24,000 in total deductions (HKD 8,000 for the taxpayer, HKD 8,000 for each child) if policies are correctly structured. The 2025-26 Budget, announced in February 2025, left the VHIS deduction cap unchanged at HKD 8,000 per policy per year, but introduced no new anti-avoidance provisions—meaning the planning window remains open for families who act before any potential legislative tightening. The stakes are amplified by the fact that the deduction is available for premiums paid for a taxpayer’s spouse and children, but only if the insured is a named person on a separate policy. This article dissects the statutory framework, the arithmetic, and the practical risks of splitting VHIS policies for children.

The Statutory Framework: Section 26D and the Per-Policy Limit

How the Deduction Limit Operates

Section 26D(1) of the Inland Revenue Ordinance (Cap. 112) allows a deduction for premiums paid under a VHIS-certified policy, up to a maximum of HKD 8,000 per policy per year of assessment. Critically, the deduction is available for premiums paid for the taxpayer, the taxpayer’s spouse, and the taxpayer’s child (as defined under Section 2 of Cap. 112). The IRD’s 2024-25 Tax Guide to Salaries Tax (p. 34) clarifies that the HKD 8,000 cap applies per policy, not per taxpayer. This means a taxpayer who pays premiums on three separate VHIS policies—one for themselves, one for their spouse, and one for a child—can claim up to HKD 24,000 in total deductions, provided the premiums actually paid meet or exceed HKD 8,000 for each policy.

The key statutory nuance is that the deduction is tied to the policy, not the insured person. If a single policy covers multiple family members (a “family plan”), the total deduction for that policy remains capped at HKD 8,000, regardless of how many individuals are insured under it. This is the central trap for unwary taxpayers.

The Definition of “Child” and Age Limits

Section 2 of Cap. 112 defines “child” to include a stepchild, adopted child, or illegitimate child of the taxpayer, provided the child is unmarried and, if aged 18 or over, is receiving full-time education. The VHIS deduction is available for a child only if the child is the insured person under a VHIS-certified policy. The IRD’s Departmental Interpretation and Practice Notes (DIPN) No. 62 (Revised 2024) confirms that the child must be a named insured on the policy; a “family plan” covering unnamed dependants does not qualify for the per-child deduction.

The Arithmetic of Splitting: A Worked Example

Scenario A: Single Family Plan

Consider a taxpayer, Mr. Chan, who has two children aged 10 and 12. He takes out a single VHIS family plan covering himself, his wife, and both children. The annual premium is HKD 28,000. Under Section 26D(1), the maximum deduction for this single policy is HKD 8,000. Mr. Chan claims HKD 8,000 on his 2025-26 salaries tax return. The remaining HKD 20,000 in premiums is not deductible.

Scenario B: Split Policies

Mr. Chan instead takes out four separate VHIS policies:

• Policy A: Insured = Mr. Chan. Premium = HKD 8,000.
• Policy B: Insured = Mrs. Chan. Premium = HKD 8,000.
• Policy C: Insured = Child 1. Premium = HKD 8,000.
• Policy D: Insured = Child 2. Premium = HKD 8,000.

Total premiums = HKD 32,000. Maximum total deduction = HKD 8,000 x 4 = HKD 32,000. Mr. Chan claims the full HKD 32,000 deduction on his 2025-26 tax return.

The difference is HKD 24,000 in additional deductions. At a marginal tax rate of 17% (the standard rate for 2025-26), this represents a tax saving of HKD 4,080. At the top marginal rate of 17% (applicable to chargeable income above HKD 200,000 after allowances), the saving is HKD 4,080.

The Premium Floor

The arithmetic only works if the premium for each policy is at least HKD 8,000. If a child’s policy premium is only HKD 5,000, the deduction for that policy is capped at HKD 5,000. The IRD’s 2024-25 Tax Guide (p. 34) explicitly states: “The amount of deduction in respect of a policy shall not exceed the amount of premium paid under that policy.” Therefore, families should ensure that each split policy carries a premium of at least HKD 8,000 to maximise the deduction.

Practical Considerations and Risks

The IRD’s Anti-Avoidance Position

The IRD has not issued specific anti-avoidance guidance on VHIS policy splitting, but the general anti-avoidance provisions of Section 61A of Cap. 112 remain a live risk. Section 61A allows the IRD to disregard any transaction that has the sole or dominant purpose of obtaining a tax benefit. In practice, the IRD has rarely applied Section 61A to straightforward VHIS policy splitting, provided the policies are genuine insurance contracts and the premiums are commercially reasonable. However, the risk increases if a taxpayer takes out multiple policies with artificially high premiums or with insurers that are not at arm’s length.

The 2025-26 Budget and Future Legislative Risk

The 2025-26 Budget, delivered by the Financial Secretary on 26 February 2025, did not amend the VHIS deduction limit. However, the government’s 2024-25 tax expenditure analysis (published in the 2025-26 Budget Booklet No. 3, p. 87) estimated the annual revenue forgone from the VHIS deduction at HKD 1.2 billion, up from HKD 950 million in 2023-24. This rising cost may prompt legislative review in the 2026-27 Budget cycle. Families should consider locking in the current structure now, as any future cap reduction or per-taxpayer limit would likely apply prospectively.

The “One Policy Per Insured” Rule

The VHIS certification regime, administered by the Insurance Authority (IA), does not prohibit a single individual from being the insured under multiple policies. However, the IA’s 2023 Guidelines on VHIS Certification (Section 4.2) state that an insurer must not issue a VHIS policy to an individual who is already covered by another VHIS policy for the same risk. This means a child cannot be insured under two separate VHIS policies simultaneously. Splitting policies means each child is insured under exactly one policy. This is the correct structure.

Premiums Paid by Third Parties

If a grandparent or other third party pays the premium on a child’s VHIS policy, the deduction accrues to the person who pays the premium, provided that person is the taxpayer claiming the deduction. Section 26D(2) of Cap. 112 requires that the premium be “paid by the person” claiming the deduction. This is straightforward if the taxpayer pays directly. However, if a grandparent pays the premium and the taxpayer reimburses them, the IRD may treat the reimbursement as a payment by the taxpayer, but documentary evidence (e.g., bank transfer records) is advisable.

The Interaction with MPF Voluntary Contributions

The VHIS deduction is separate from the Mandatory Provident Fund (MPF) deduction under Section 26B of Cap. 112. The MPF deduction is capped at HKD 18,000 per year (for voluntary contributions by employees and self-employed persons). The VHIS deduction does not reduce the MPF deduction cap. A taxpayer can claim both deductions in full, provided the premiums and MPF contributions are actually paid.

Strategic Recommendations for Tax Year 2025-26

1. Audit Existing Policies

Review all existing VHIS policies to determine whether they are structured as family plans or individual policies. If a family plan is in place, consider replacing it with separate policies for each family member before the 2025-26 tax year ends (31 March 2026). The IRD accepts deductions for premiums paid during the year of assessment, so mid-year switching is permissible.

2. Ensure Premiums Meet the HKD 8,000 Floor

For each child’s policy, verify that the annual premium is at least HKD 8,000. If the premium is lower, consider upgrading the policy to a higher-tier VHIS plan (e.g., from Standard Plan to Flexi Plan) to increase the premium. The IRD’s deduction limit is per policy, not per premium dollar, so the marginal benefit of an additional premium dollar above HKD 8,000 is zero.

3. Document Payment Evidence

Maintain clear records of premium payments, including bank statements, credit card statements, or insurer receipts. The IRD may request supporting documents during an audit. The statute of limitations for tax assessments under Section 60 of Cap. 112 is six years from the end of the year of assessment, so retain records for at least seven years.

4. Monitor Legislative Changes

The 2026-27 Budget, expected in February 2026, may introduce changes to the VHIS deduction. Subscribe to the IRD’s e-newsletter or consult a licensed tax advisor for updates. Any legislative amendment would likely be announced in the Budget and take effect from the following year of assessment.

5. Consider the Marginal Tax Rate

The benefit of splitting policies is proportional to the taxpayer’s marginal tax rate. For taxpayers in the 2% standard rate band (chargeable income below HKD 50,000), the saving is negligible. For those in the 17% band, the saving is material. Run a simple calculation: (HKD 8,000 x number of insured persons) x marginal tax rate = maximum annual saving.

Closing Section: Actionable Takeaways

• Replace any family-plan VHIS policy with separate individual policies for each family member before 31 March 2026 to maximise the per-policy deduction limit.
• Ensure each child’s policy carries an annual premium of at least HKD 8,000 to fully utilise the deduction cap under Section 26D(1) of Cap. 112.
• Retain all payment records for at least seven years, as the IRD has six years to raise an assessment under Section 60 of Cap. 112.
• Monitor the 2026-27 Budget for potential legislative tightening, as the government’s tax expenditure analysis indicates rising revenue forgone from the VHIS deduction.
• Consult a licensed tax advisor or CPA to confirm the eligibility of specific policy structures, particularly where premiums are paid by third parties or where children are aged 18 or over.

Disclaimer: 本文不構成稅務建議。涉及個人稅務情況請諮詢持牌會計師或稅務師。 / This does not constitute tax advice. Consult a licensed CPA or tax advisor for your specific situation.