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Brexit: Practitioners urge caution but possible silver lining for non-doms

Monday, 27 June, 2016

The UK referendum vote to leave the European Union casts significant doubt on the Summer Budget 2015 reforms to the taxation of non-domiciled residents, according to experts.

None of the planned reforms were included in this year's Finance Bill, the government's intent being to consult this autumn and legislate in the Finance Bill 2017. However, it is now likely that the government's tax priorities will lie elsewhere, and thus it is possible that the measures will be dropped or postponed. 'It is unlikely that the changes to the non-domicile regime announced in the 2015 budget will go through in 2017 as forecast, as there will be bigger fish to fry in the Treasury', commented non-dom tax law expert Mark Davies.

'There has to be an even greater uncertainty about the timing and perhaps even the future of the reforms', said Dhana Sabanathan TEP, partner at law firm McDermott Will & Emery. 'The implications of Brexit on the rules governing non-doms are unclear […]', commented Michael Taylor of Irwin Mitchell Private Wealth. 'It is entirely possible that the UK could become even more attractive to this profile of individual [wealthy foreigners who are tax resident but non-domiciled in the UK] if the tax benefits remain attractive or are improved. The UK could become the new Switzerland for international wealthy individuals and families. However, if economic uncertainty forces successive governments to raise more tax the reform of the benign legislation affecting the tax status of non-doms might be in danger.'

Not everyone is of the same opinion, however. Law firm Baker & McKenzie states that it still expects that the changes announced in the 2015 Budget, regarding long term UK resident non-domiciliaries, to be implemented as expected.

Meanwhile, Britain's eventual exit from the EU has caused instability in world markets, as traders who expected a 'Remain' vote re-adjust their positions in sterling, gilts and equities to minimise their risk exposure.

'It is clear that the result has caused considerable volatility in markets, but this is not Armageddon', said Alistair Peel of Strabens Hall. 'Investors should not be tempted to respond too hastily, and we advise our clients to carefully monitor and analyse developments before rushing to restructure their portfolios.' This is also the advice of Rathbones Investment Management Intl: 'The result of the referendum leaves a lot of uncertainty. This will weigh heavily on both economic growth and financial markets. As long-term investors we encourage clients not to worry unduly […] Nonetheless, we face bouts of volatility for at least two years until we know how the UK will interact with Europe economically and financially.'

According to some commentators, the Brexit vote may also dislocate the UK property market. 'There is expected to be a fairly immediate fall in property prices, especially amongst high value property in London' said Henry Stuart of Withers Worldwide. 'There is also the potential for a repeat of the market situation in 2009, when cash-rich foreign investors took advantage of a fall in sterling to make bargain acquisitions. If Brexit forces interest rates up and inflation also rises, property will become even more attractive as a safe haven investment.'

'The fall in sterling makes investing in the UK better value, and it may be that we will now see an increase in investment activity in the London property market', said Piers Master TEP of Charles Russell Speechlys. He also suggested that the technical tax changes affecting the inheritance tax treatment of some UK residential property structures, which were announced in summer 2015, may now be deferred or abolished. 'Such a move would certainly be welcomed by international investors who dislike frequent change in UK tax law', he said.

In the weeks ahead, practitioners will be monitoring developments and awaiting the exact terms of the UK's exit from the European Union as planning for the future is essential for their clients. STEP Interim Chief Executive George Hodgson said: 'The UK vote to leave the European Union has huge implications for cross-border families, both in the UK and in Europe. Their position will need very careful consideration in the Brexit negotiations in the weeks and months ahead, and STEP will take an active role in highlighting their concerns to help provide certainty and enable these families to plan for their futures.'

Who knows what the future holds? As Rathbones Investment Management Intl point out: 'There is even a chance that the UK could remain in the EU – the referendum is not legally binding and Parliament must vote to repeal the 1972 European Communities Act.'