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GUEST ARTICLE: Non-Doms And The Brexit Dimension

Simon Baylis

Moore Stephens

16 November 2016

As readers will have seen recently here in commentary from experts, the UK has changed how the non-domiciled residency system works, with profound implications for the wealth management businesses that have served this population segment. Another dimension of debate is how the UK’s vote to leave the European Union affects the picture. With this in mind, Simon Baylis, a partner in the Moore Stephens private client services team in the UK, takes a closer look at how these issues intersect. As ever, editors of this publication welcome readers’ responses and don’t necessarily endorse all views expressed from guest contributors.

The recent Brexit vote, as well as the changes in their tax status announced in the 2015 Summer Budget, has caused many non-doms to question whether or not they wish to leave the UK. If this really were to UK economy, UK and UK property would be negatively impacted – but what will be the extent of the detrimental effect? 

Changes to the tax status of UK non-doms
As has been reported, the government announced its intention to change the tax treatment of non-UK domiciliaries (non-doms) in the summer budget of 2015. A process of consultation on those changes has been ongoing. We have been provided with draft legislation on the new definition of non-UK domicile, but the details of some of the reforms had been withheld until the publication of a consultation document that was issued on 19 August 2016.

There are still some areas where more information is required, and the details are not finalised, but we do, at last, have a better sense of what the post-6 April 2017 regime will look like.

The changes include:

-- a new concept of deemed UK domicile for those who have been UK resident for more than 15 out of the previous 20 years which applies to all direct taxes;

-- transitional provisions which allow a tax-free rebasing of foreign assets in certain circumstances, as well as a limited ability to unravel historic funds held overseas which could otherwise not be remitted to the UK without a tax charge;     

-- changing the treatment of offshore structures such as trusts settled by and overseas companies where held by deemed UK domiciliaries. These measures are likely to be subject to further change;

-- subjecting UK residential property to inheritance tax where it is held through offshore structures, even where the beneficial owner is not resident in the UK. 

The next likely point when an update can be expected is 5 December 2016, on publication of the draft 2017 Finance Bill. However, the rules may still then be subject to change and this will leave affected individuals and structures very little time to plan what action to take before 5 April 2017. 

Impact of changes on UK non-doms
The question, therefore, remains whether these measures, and the announced transitional provisions will cause HNW non-doms to leave the UK or take other steps which could be detrimental to the UK.

To assess the likely impact, we carried out a survey of our non-dom clients which revealed that of those who owned a business in the UK, 23 per cent said they were considering selling their business after April 2017.

Should non-doms decide to sell their businesses, the UK economy would suffer a serious blow, losing high-value jobs and investment.

The changes to their tax status has, as would be expected, sparked concern amongst non-doms and provoked many to also reconsider where they wish to live.

Indeed, of the non-doms surveyed, 37 per cent said that they were thinking of leaving the UK, citing the changes to tax status and the recent Brexit vote as the main reasons for leaving. This reflects our experience in practice, as about a third of our non-dom clients are actively considering leaving the UK. 

If non-doms themselves decide to leave the UK, there will obviously be an adverse effect on UK business, with 41 per cent of non-doms expecting staffing levels in their UK businesses to decrease as a result of the April 2017 changes.

Aside from the recent changes to their tax status, uncertainty over what the UK’s decision to leave the EU will mean for the UK’s trade links with EU countries has meant that business owners are considering the location of their UK-based businesses.

The survey also revealed that 20 per cent of non-doms who own UK property are thinking of selling within the next three years, indicating that many non-doms are anticipating a move in the near future.

Should a high proportion of non-doms sell their UK property there could be severe repercussions for the UK’s luxury property market, particularly in London directly affecting those property developers, real estate agencies and individuals involved in this market.

Although the housing market can be unpredictable, losses for central London developers are likely to have some negative effect on the rest of the market.

The UK is in a global market to attract international mobile HNW individuals to live and spend in the UK. There are many other places which offer attractive tax benefits, as well as similar lifestyles and education systems, so it is important that the UK government recognises this and takes steps to make sure non-doms continue to choose to come to and remain resident in the UK.