Market UpdateMarch 4 2020

Wealth Creators Post Brexit

8 mins read

As we all know, Brexit is finally happening at the end of this year. We are being asked lots of questions by the families that we look after about the practical implications. As a result of these questions being asked, we teamed up with Garnham Family Office Services to host an evening to discuss some of the issues for ‘Wealth Creators Post Brexit’ and post some of the burning questions that are being asked by families and individuals to a panel of experts.

On the panel were Martin Territt (former EU Ambassador), Chris Kalin (dubbed by Bloomberg as “The Passport King”), Ross Birkbeck (Tax Barrister with 15 Old Square Chambers), Caroline Garnham (Founder of Garnham Family Office Services and our panel facilitator) and Sam Bosanquet (Director, Sandaire Family Office Services).

Below we have shared some of the questions and answers from our panel:

Sam, as a Director of Family Office Services at Sandaire, how concerned are your clients on the impact on their wealth post Brexit?

The answer to that question would be ‘very’ concerned, but that is not to say that we are expecting Armageddon. There are a clear set of financial and practical challenges facing our clients. For UK families, the fate of Sterling will be a significant issue and influenced significantly by trade policy and negotiations. Some of our UK clients have made substantial gains in the past through Foreign Exchange and they want to hold onto these. For international families, the UK is still ‘on sale’, but will it become cheaper? And how welcome will foreign capital be here? On the practical front, key considerations such as Tax and Residency arise. In particular, this affects resident non domiciled individuals and overseas families with children studying or working in the UK. Will ongoing residency be an issue for them? We need to work through their plans and identify the unexpected risks.

Martin, when it comes to trade deals and the UK’s need to negotiate with other countries, including the US and the EU. These usually take many years. From your experience how likely is it that the UK will agree sufficient Free Trade Deals with other countries, so as not to affect its competitiveness globally, by the end of this year?

This is a very difficult question to answer and of course I do not have a crystal ball but I do believe that it will be a possibility by the end of this year. A new mandate was in fact negotiated today (25/02/2020) by Parliament. I do believe that issues have been over exaggerated and there is indeed fair competition. There are factors such as state aid to enterprises and Labour rights which companies are asking ‘are these going to be reduced?’ but in terms of whether or not there is enough proper negotiation power on both sides the answer is yes, significantly. By the 2nd of March we should see an intensification of the negotiations.

Between the UK and the EU there is trade surplus of £450 billion. In terms of the US, there is an invested interest and substantial money to be made from the UK which aids the fund system in the US, so this will pose as an issue for the US. To be precise there is £105 billion of revenue made through trade deals between the UK and US and in most cases, the further out that you move geographically the more trade drops because of the distances involved and the complexity of the supply chain.

In summary, I believe there is a solid case for getting an agreement in place by the end of the year, it is possible but there will be plenty of haggling and negotiations along the way.

Ross, with the UK leaving the EU, this will mean that we will lose our EU Freedoms; the right to establish, the right to physically move and the right to move capital. Your Tax Chambers has used these rights against HMRC in the ongoing case of Fisher. How much will this loss be to the average UK taxpayer in his fight against abuses of power of HMRC given that the UK will remain a signatory of the European Convention of Human Rights?

It is correct that, at present, we enjoy the benefits in Chambers of our EU freedoms to take on revenue and push back on powers. However, I do believe there is some confusion around this subject. At present there are two substantial rules that allow us to challenge Parliament and these are the Convention of Human Rights, which we are not going to be losing regardless of Brexit, and the EU freedoms (workers, goods, capital and services).

The loss of the EU freedoms will make it harder to move capital outside of the EU, however  anti-avoidance tax laws have been around since the 1920s which are contrary to the Freedom of Capital. EU law is a powerful tool but it is very narrow. Tax law will continue to remain the same regardless of where you are in the world and so, regardless of the UK being within the EU, the tax benefits are slim. There are instances where the Convention of Human rights is incorporated into legislation, for example when HMRC take money without telling you that they are intending to do so, which judges are increasingly realising is a contradiction and can be a violation of the Convention of Human Rights.

There are other aspects such as the Right to Property, which is not un-useful but the cases in which this has helped are slim. Regardless of all of this, tax is international and so there are unlikely to be significant changes to the UK taxpayer.

Chris, do you see there being a problem for UK residents seeking a second passport following Brexit?

In short, no. I believe that there will be no measurable impact on individuals applying for passports outside of the UK. Of course if someone was to find out that they have a Grandparent from Switzerland or Ireland then I would always recommend applying for a second passport, but in terms of the noise around travel for UK citizens being impacted, it won’t be.

The freedom of movement has always enabled an individual with money and a profession to travel relatively freely and for wealthy clients, the right of establishment has been an option, should you have the funds to pay to establish yourself in another EU country.

There may be a permit where there wasn’t previously but in terms of impact, I do not believe it will be significant.

Martin, now that Ireland has seen a surprise victory for the Sinn Fein party, do you think Ireland will see a cooling of interest in businesses seeking to relocate to Ireland, especially since the increase in administration costs of between 4-8% for business imports and exports, even before tariffs are added?

Ireland simply don’t have the numbers, unless they establish a coalition with the Green party to come up with a workable majority. Moody’s recent rating bet against the party, changing their outlook from positive to stable.

I know of a US client that was previously considering establishing in the UK and they have now decided that they aren’t going to do so and they are looking at Ireland instead. They require approvals and a strong regulatory regime which are established in Ireland.

Another example of this is Mastercard who are establishing a huge new base for their new business outside of Dublin, which will create around 1600 new jobs, which is fantastic for the economy. There will of course continue to be companies relocating back into central London because of passporting rights now due to Brexit.

Another aspect to consider is that the companies in the Northern part of the UK that went blue for the election will quickly go back red unless jobs are created.

In November 2018 a report by the British Civil Service forecasted a hit on GBP growth by almost 5% post Brexit, so there is of course a risk that these figures may drop.

Ross, leaving the EU will mean that we will also be out of VAT which is a European tax. How will this affect our financial services industry and our global business competitiveness generally?

Well I think the first point to make is that VAT is most definitely not going anywhere, we are still going to have to pay VAT and it will be along the same lines as it is now, so the financial cost will not differ all that much but there will be other implications such as a more significant cost on the administrative side with additional customs processes for exports in and out of the EU and the cost of businesses to have a presence within the EU.

The Financial Services industry will be protected when it comes to selling into the EU, as there are already agreements in place from previous times around these services.

Another thing I expect to see are more questions arising regarding new laws that are put in place around the jurisdictions. For private clients being outside of the EU may become cheaper, as outside of the EU you don’t have to charge VAT but inside of the UK you have not been able to reclaim this previously. This will change and there will be clear advantages there.

Chris, with the UK leaving the EU are we going to see more vulnerability, for example if you look at the Cayman Islands and how they were blacklisted?

I think this really depends on a few points, firstly whether or not you are looking at smaller countries associated with the UK or smaller countries in general. It really depends on your point of view. I personally do not think that Brexit is really an issue for the UK, the country is big enough and strong enough regardless of whether it is in or out of the EU.

Depending on your perspective, I do however believe that it will be different for the EU. They have lost a major contributor and Nordic member, as well as one of the few with a strong Rule of Law, alongside Germany and a couple of others. I joke but go to court in Italy, good luck, 15 years later you will have to find another way of sorting it out!

There are other aspects to consider such as Cross Border English Law Contracts, most trusts are generated in either the UK or Geneva because the legal system can trust that these are secure and effective.

In terms of the blacklisting of the Cayman Islands and whether this is an issue for the UK, if you actually look at the EU’s criteria, they would have blacklisted other countries such as the US many years ago, but the EU is politicised. My concern is that the EU is now going to have to drift in another direction now that it has lost its legal anchor.

Sam, as my final question, your clients have specific concerns, maybe you would like to take this opportunity to ask the panel on some specific issues facing your clients?

I think one of the main concerns that we are hearing, particularly from international clients and other families that we are speaking to, whether they are from Saudi Arabia or South America, is that Brexit is another example of the UK moving its goal posts once again. My question would be, if a client was asking you ‘would you still come to the UK as a resident non domiciled individual?’ do you believe it is still appealing for these international families?

The domicile enquiries to become a long term resident non domicile have changed quite significantly in recent years. In 2010 the residency test was introduced and the seven year rule has gone completely, no matter how much you pay. The reality is that the rules have tightened and the UK’s image of being ‘open doors to the worlds wealthy’ is over, they are very much treated like everyone else.

There is one aspect of the UK however which will not change and is incredibly attractive to international clients in comparison to other EU countries such as Switzerland etc. and it is the Worldwide culture appeal of London particularly. You can move to London and be at home culturally and you will struggle to find this in any other EU country.

Also Martin, you seem optimistic on Trade Deals. Are the particular industries that you may see being more or less likely to negotiate, for example the Food and Beverage industry?

It is hard to predict but I believe the food and beverage industry is less likely to be affected, as there are significant flows of money in both directions, but of course not as much as bigger institutions. My guess is that Mainland UK won’t take a massive hit and Central London will be given a ‘freebie’. Less than 10% is my guess for industries such as food and beverages, although not insignificant I understand, I believe there will be a natural shake out.