GUEST ARTICLE: Non-Doms Get Itchy Feet After Brexit Vote - Will They Walk Away?

León Fernando Del Canto Del Canto Chambers Barrister managing partner London 11 August 2016

GUEST ARTICLE: Non-Doms Get Itchy Feet After Brexit Vote - Will They Walk Away?

As part of a continuing series of analyses about the impact of Brexit, this article considers whether the vote will encourage a significant number of nom-domiciled persons living in the country to leave.

Recent figures showing a significant number of non-domiciled resident are thinking of quitting the UK after the country voted to leave the European Union add to controversy about the momentous vote. Already, this news service has carried articles about what might be the impact on wealthy persons living in the UK as a result of Brexit. The outlook remains cloudy, in part because the UK is in the midst of negotiations with the EU on whether Britain retains access to the Single Market, or opts for some other, looser arrangement, or takes some other course. It is also worth noting that a year ago, the UK government changed the rules to stop the possibility of a person being a permanent non-dom. There have also been moves by lawmakers to reduce some of the perceived privileges enjoyed by wealthy foreigners. León Fernando Del Canto, a barrister and managing partner at Del Canto Chambers, is the author of this commentary about the non-dom question. As always, the editors of this publication are pleased to accept contributions from readers but stress that they don’t necessarily agree with all the views expressed. (Here is another article on the same topic.) For details on an upcoming Breakfast Briefing this publication is holding on the Brexit issue, click here.

It was reported at the end of July – one month after the UK voted to leave the EU – that almost 40 per cent of non-doms are considering permanently leaving the UK, according to accountancy firm Moore Stephens. Two-thirds of this number cited their reason for wanting to leave as being due to their tax status.

There is deep concern that the UK economy will suffer as a result of non-doms leaving. Not only do these high net worth individuals contribute a large sum through taxes, but they are also responsible for spending and investing a significant amount of money in the UK’s industries and products. On top of this, non-doms help to create jobs in the UK through their various businesses, and a departure of them would be a big blow to the country’s economy. It is also worth remembering that after Brexit, foreign direct investment will be more important that perhaps it has ever been.  

One of the distinctive features of the UK tax system when comparing it to those in continental Europe is the tax exemption that applies to foreign income, gains and other international taxable events for taxpayers who are non-domiciled in the UK, even if they happen to be a tax resident in the UK. This regime dates back to 1799 and has been a sole driver for many foreigners to establish their residence in the UK. 

This has been the case until recently, when the 2015 budget was announced, and the regime came under siege - most probably, as a concession to our EU neighbours. Last year’s budget statement stated that those who have lived in the UK for more than 15 years over the past two decades will be deemed domiciled as of 6 April 2017. This alteration to the tax status of non-doms means that their foreign income will be subjected to income, capital gains and even inheritance tax. 

Between this blow delivered last year and now the UK’s vote to leave the EU, it is no wonder that non-doms are feeling unsettled and that 40 per cent now want to leave the UK. European financial centres may be hoping to cash in on this by attracting non-doms who are choosing to leave London. While they may not have the kind of appealing rules that the UK has traditionally had in place to determine domicile, the fear for non-doms is that they will be substantially limited in terms of activity that they can undertake in the UK going forward.

It is unlikely that EU countries will change their stance in terms of their non-dom regime that they have in place. The UK regime has been consistently denounced by the Union as well as by the Organisation for Economic Co-operation and Development; both have condemned it for resulting in a discriminatory advantage for the UK, making it effectively a kind of tax haven for those who benefit from it. 

Non-doms are not just high-spenders whose presence benefits a local economy, but in fact add a great deal of financial value to the economy in various ways. They include active investors, top executives, bankers, company owners and entrepreneurs to name a few, who are continuously influencing the micro and macro economy of the country that they live in. Many non-doms originally come from countries outside of the EU and use their UK residence as a way of making investments, buying properties and moving around the EU with ease (provided of course they have a Schengen visa.)

George Osborne’s plan to scrap the different tax rules for non-doms attempts to raise £1.5 billion over the course of this parliament. The more likely reality is that the UK will simply lose its appeal to wealthy individuals who are now considering packing up and selling their businesses and properties in the UK. Losing wealth creators who participate a great deal to the richness culturally and economically of this country is not ideal. 

Despite this concern, Theresa May’s recent statement that she intends to keep the three basic European freedoms intact (the free circulation of goods, capitals and people) has injected much more confidence in the UK that the country will not be ostracised from the rest of Europe. To this end, it would be wise to consider keeping the non-dom and residency rules as attractive as they have traditionally always been. 

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