Brexit: What are the implications for private clients?

Much ink has already been spilled on the subject of what Brexit is likely to mean for the UK economy and businesses in various sectors.

There has been less comment on the legal, fiscal and practical implications for private clients who are resident in or who may wish to move to the UK.

Known unknowns

Firm predictions are of course utterly impossible, given the enormous uncertainty as to whether the UK will in fact secede from the EU, and on what terms. While it is clear that a significant part of the British population has voted against EU membership for the UK, it is entirely unclear what the people of Britain would wish to put in its place, unclear whether all those who voted to leave actually intended that outcome, and unclear whether a Government can be formed that will actually be committed to pushing this dramatic constitutional change through. The situation is, to say the least, complicated.

Even if we assume that Brexit will happen, there is a wide spectrum of opinion about when the UK would actually leave the Union. This turns on when the decoupling procedure in Article 50 of the Lisbon Treaty is initiated and whether the UK’s departure occurs on the second anniversary of that date, as prescribed by Article 50, or whether extra time is allowed for post-Brexit deals to be negotiated with the EU institutions. An extension would require a unanimous decision of the European Council, which currently looks somewhat doubtful.

It appears that a standoff may be developing between the UK and the rest of the EU, with David Cameron indicating that his Government will resist pressure from the EU to initiate the Article 50 procedure until there have been informal discussions about what sort of relationship the UK could have with the EU after Brexit, but Angela Merkel and others stating that the EU member states will not be prepared to open negotiations with the UK until the de-coupling procedure has commenced. A potential way forward may be for the UK to negotiate a fixed but extended period for the de-coupling. But that would leave the UK extremely vulnerable to the risk of negotiations with the EU member states foundering, eventually resulting in a Brexit without any deal having been struck to protect the UK’s ability to trade with and export services to the EU.

What long-term effect will this have on the UK’s economy and currency? As Zhou Enlai famously said of the impact of the French Revolution, it is too soon to say. However, the immediate economic shockwaves have of course been felt.

Brexonomics

UK listed shares have, in fact, generally shown reasonable resilience over the last few days, no doubt partly reflecting the very international nature of the companies listed on the LSE. It would perhaps be premature to conclude that this will be an exit pursued by a bear market. However, there has been significant downward pressure on sterling, which has recently fallen to its lowest level against the US dollar in the last 31 years. Obviously, this currency movement will affect different private clients in different ways.

If the reduction in the pound’s relative value is sustained, then for foreign domiciled individuals who have cash or portfolios denominated in other currencies, and who “think” in another currency, this may well encourage inward investment. For such an individual who is contemplating a move to the UK, the price of prime residential property in London has just fallen significantly, and so has the price of an investor visa.

Some foreign domiciliaries will definitely see this as a buying opportunity. Others will wish to sit on the sidelines until there is greater clarity about the UK’s future. It is hard to say which group will predominate. However, Brexit should not really affect the “fundamentals” of why many of the world’s wealthy have gravitated to the UK, and particularly London. The latter will still have plenty of cosmopolitan appeal, and the UK will retain the benefit of its famous rule of law and, it is hoped, a tax system which will continue to be attractive for foreign investors and foreign-domiciled residents.

It must be likely therefore that the flow of capital into the UK from foreign domiciled individuals will continue, although the sources of that capital may change over time. In particular, it is possible that EU nationals will represent a gradually dwindling proportion of the UK’s non-dom population.

Immigration

Which brings us to the subject of immigration. There are two main questions here, one being whether EU nationals who are already in the UK, exercising treaty rights, will be allowed to stay, and the other being whether EU nationals who are currently living outside the UK will still have the ability to enter the UK to work after any secession.

There is no reason to think that Brexit will have any negative impact on the ability of non-EU nationals to enter the UK. It is, in fact, likely that any restriction on the free movement of people from the EU would be accompanied by a corresponding increase in the number of non-EU nationals who are granted visas.

David Cameron has sought to reassure European citizens living in the UK “that there will be no immediate changes in their circumstances”. How reassuring that is debatable. The prevailing view among immigration lawyers seems to be that if the UK does leave the EU, there will be nothing in the EU treaty, or indeed the Vienna Convention of 1969, which will in itself preserve the rights of EU nationals who are already residing in the UK.

However, given the often glacial velocity of treaty negotiations, the UK’s departure from the EU could, according to some experts, take much, much more than two years – perhaps as long as a decade. If so, European citizens who are currently residing in the UK may have plenty of time to acquire indefinite leave to remain (ILR) before their EU treaty rights evaporate. Under current rules, ILR is typically available after five years of residence in the UK as an EU national, and British citizenship can normally be applied for one year after that.

Even if the secession comes sooner than that, it seems almost inconceivable that the UK will not put in place measures to “grandfather” the right to remain of such individuals. It seems very likely that transitional rules will be put in place to allow them to live and work in the UK and, after the required period of five years residence, apply for ILR. The prospect of EU citizens who are already in the UK being evicted seems remote.

Whether EU nationals will still have rights to move to the UK to work, after the UK has splintered away from the EU, is less clear. It is conceivable that they will.

A possible outcome of the Article 50 negotiations is that the UK will accept the free movement of EU national workers into the UK, as a condition for unrestricted access to European markets. That would result in a situation for the UK which is superficially similar to the status quo, but with (even) less influence over EU laws and regulation. Any such deal would be anathema to some, but obviously it would be good news for prospective immigrants to the UK with EU passports.

Tax trends

What Brexit would do to personal taxation is another area of – you guessed it – uncertainty. In April, the Treasury published a report suggesting that a withdrawal of the UK from the EU would have a rather frightening cost in terms of lost tax receipts, equivalent to 8p on the basic rate of income tax. However, the figures were widely challenged.

In the last few days, George Osborne has stated that tax rises will be, in his view, unavoidable “within months” if the UK is to cope with the impact on public finances of the Brexit vote. Tax rises and/or a cutting back of tax reliefs do now seem likely as the UK strives to balance its books, in an atmosphere of chronic uncertainty and a likely reduction of investment into the UK by global businesses. Income tax relief for pension contributions could be an easy target, and Osborne’s decision in the last budget to slash the rate of tax on capital gains looks, in light of recent events, even stranger than it did at the time. It would be no great surprise if the rate reverts to 28% in April 2017.

The usual advice for wealthy individuals in times of fiscal austerity is likely to hold good: if possible, consider accelerating taxable receipts, whether in the form of income or gain, and also consider accelerating any steps which would under the current rules qualify for tax relief, in case tax rates increase or reliefs are withdrawn. Still no news for the non-doms

Many private clients will be watching anxiously for announcements, but perhaps none more so than foreign domiciliaries who have been UK resident in fifteen or more tax years. These individuals, who form a small but economically significant section of the taxpaying public, are facing the prospect of becoming deemed domiciled in the UK for all tax purposes in April 2017, under new rules that were first announced in July 2015.

For individuals who will be affected by these rules, and their advisors, the last year or so has been a waiting game. Information has been keenly awaited regarding how the tax legislation will be amended, in particular with respect to the treatment of trusts resident outside the UK. The Treasury has indicated that certain trusts established before the onset of deemed domiciled status will have a privileged tax treatment, but so far crucial detail on which trusts will qualify, and how benefits from them will be treated, has been strikingly absent.

Anecdotally, much-needed work on this was put on hold by the Treasury many months ago, pending the Brexit referendum. It was indicated by Treasury sources that further information would be released either before the summer recess, which starts on 21 July, or otherwise in September or October. It now seems very questionable whether this loose timetable can or will be adhered to, in view of the other demands on governmental time.

Further information is also awaited regarding Government proposals to introduce a new rule, again with effect from April 2017, which will make interests in non-UK entities that own UK residential property “transparent” for inheritance tax purposes. If this change is indeed implemented, it is likely to trigger a wave of “de-enveloping”, i.e. dismantling of property-owning structures created by foreign domiciliaries.

Generally, such structures were created because they provided protection against inheritance tax (IHT) for foreign-domiciled UBOs. There are already significant annual tax costs to keeping these structures in place, and incurring further such costs will be futile if the IHT advantage of these structures evaporates. However, so far many private clients have delayed making a decision on this. Their hope has been that the Government will confirm whether it is prepared to offer any relief from the “dry” tax charges (to CGT and/or SDLT) that can be triggered by “de-enveloping” exercises. Again, it was hoped that an announcement would be made before the summer recess or, failing that, in the autumn. But this is now looking less likely.

The fear of many advisers is that this risks turning into a re-run of the non-dom tax reforms of 2008. Those reforms were subsequently described by a Parliamentary working party as “an object lesson in how not to legislate”. The working party found that the lack of time for proper consideration and consultation meant that “…draft clauses were produced for consultation but these were riddled with errors and conceptually unsound … Substantial and essential amendments were still being produced at a late stage, leaving insufficient time for adequate scrutiny both in and outside Parliament.”

Perhaps even more seriously, non-dom taxpayers in early 2008 were being required to second-guess the outcome of an uncertain statutory drafting process which did not complete until some months after the date on which the legislation came into force. The episode shook the confidence of many non-doms, and had a lasting negative impact on the UK’s reputation for stability and fair treatment of its taxpayers. It would be hugely regrettable if the lessons of 2008 have not been learned.

We hope therefore that the Government will recognise the need to push the implementation of the deemed domicile rules and IHT “transparency” rule back to April 2018, unless draft legislation can be issued in September or October. However, up to now the Treasury/HMRC have rejected calls for a relaxation of
the timetable.

Private clients who will be affected by these changes, if and when they are made, may wish to consult their advisers on what preparatory steps can sensibly be taken now.