In 1839, the refusal by Qing Dynasty authorities to import opium resulted in the First Opium Warbetween China and Britain. Hong Kong Island was occupied by British forces on 20 January 1841 and was initially ceded under the Convention of Chuenpee as part of a ceasefire agreement between Captain Charles Elliot and Governor Qishan, but the agreement was never ratified due to a dispute between high ranking officials in both governments. It was not until 29 August 1842 that the island was formally ceded in perpetuity to the United Kingdom under the Treaty of Nanking. The British established a crown colony with the founding of Victoria City the following year.

In 1860, after China's defeat in the Second Opium War, the Kowloon Peninsula and Stonecutter's Island were ceded in perpetuity to Britain under the Convention of Peking.

In 1894, the deadly Third Pandemic of bubonic plague spread from China to Hong Kong, causing 50,000–100,000 deaths.

In 1898, under the terms of the Convention for the Extension of Hong Kong Territory, Britain obtained a 99-year lease of Lantau Island and the adjacent northern lands, which became known as the New Territories. Hong Kong's territory has remained unchanged to the present.

During the first half of the 20th century, Hong Kong was a free port, serving as an entrepôt of the British Empire. The British introduced an education system based on their own model, while the local Chinese population had little contact with the European community of wealthy tai-pans settled near Victoria Peak.

In conjunction with its military campaign, the Empire of Japan invaded Hong Kong on 8 December 1941. The Battle of Hong Kong ended with British and Canadian defenders surrendering control of the colony to Japan on 25 December. During the Japanese occupation of Hong Kong, civilians suffered widespread food shortages, rationing, and hyper-inflation due to forced exchange of currency for military notes. Through a policy of enforced repatriation of the unemployed to the mainland throughout the period, because of the scarcity of food, the population of Hong Kong had dwindled from 1.6 million in 1941 to 600,000 in 1945, when the United Kingdom resumed control of the colony.

Hong Kong's population recovered quickly as a wave of migrants from China arrived for refuge from the ongoing Chinese Civil War. When the PRC was proclaimed in 1949, more migrants fled to Hong Kong for fear of persecution by the Communist Party. Many corporations in Shanghai and Guangzhou shifted their operations to Hong Kong.
In the 1950s, Hong Kong's rapid industrialisation was driven by textile exports and other expanded manufacturing industries. As the population grew and labour costs remained low, living standards rose steadily. The construction of Shek Kip Mei Estate in 1953 followed a massive slum fire, and marked the beginning of the public housing estate programme designed to cope with the huge influx of immigrants. Trade in Hong Kong accelerated even further when Shenzhen, immediately north of Hong Kong, became a special economic zone of the PRC, and Hong Kong was established as the main source of foreign investment in China. The manufacturing competitiveness gradually declined in Hong Kong due to the development of the manufacturing industry in southern China beginning in the early 1980s. By contrast, the service industry in Hong Kong experienced high rates of growth in the 1980s and 1990s after absorbing workers released from the manufacturing industry.
In 1983, when the United Kingdom reclassified Hong Kong from a British crown colony to a dependent territory, the governments of the United Kingdom and China were already discussing the issue of Hong Kong's sovereignty due to the impending expiry (within two decades) of the lease of the New Territories. In 1984, the Sino-British Joint Declaration – an agreement to transfer sovereignty to the People's Republic of China in 1997 – was signed. It stipulated that Hong Kong would be governed as a special administrative region, retaining its laws and a high degree of autonomy for at least 50 years after the transfer. The Hong Kong Basic Law, which would serve as the constitutional document after the transfer, was ratified in 1990.