Since the EU referendum result, in which the UK voted to leave the EU with an overall 52% to 48% majority, many clients have been asking us how this will impact them, both personally and financially. In this newsletter, we look at some of the “knowns” and “unknowns”.
At present, as highlighted in the media, the only thing we are certain of, is that nothing is certain. Interestingly, David Cameron chose not to invoke Article 50 of the Lisbon Treaty immediately after the referendum results, despite hinting before the vote that he would. Instead, he tended his resignation and left that to the new incoming Prime Minister to action. Only once Article 50 is invoked, is the UK committed to an exit from the EU with a two year time frame for negotiations. That means, as of today, nothing has officially changed and the UK is still a member of the EU.
The other interesting development was the Chancellor, George Osborne’s decision to postpone the emergency budget he had originally suggested would take place immediately after the vote, with promises of tax rises and other austerity measures that would be needed to plug the projected £30bn hole in the UK economy.
We can, however, expect a new budget once the new Prime Minister is in place, likely to be at some point in October 2016. The open question is whether we will see the type of tax rises that were suggested before the vote, namely a potential 2% increase in basic rate tax (up to 22%), 3% increase in the higher rate (up to 43%) and a 5% increase in inheritance tax (up to 45%).
But what will the situation be after the UK has left the EU and what is the outlook for expats moving in and out of the UK?
There is a growing possibility that not much will really change. Whilst leave campaigners based their campaign on controlling immigration, moving to a points system for high skilled labour, the message from Brussels is that the UK must keep free movement of labour if it wants access to the single market. This could retain the ability for UK expats to work in the EU and EU expats to work in the UK. Given the leave campaign’s commitment to controlled immigration, it remains to be seen whether it will then become more difficult for non EU citizens to gain visas to work in the UK, which could become the only area of immigration that remains under UK control. Conversely, we may see negotiations that allow some form of controlled “EU” immigration in addition to access to the single market, but it seems unlikely that the UK will want to strike a deal that removes free trade completely, so the cards may be held by the remaining 27 members of the EU. That said, the fact that the UK is Germany’s 3rd largest export market after the US and France (worth over Euro 89bn), may well give the negotiations some added spin.
One area that has hit expats in the pocket already, is the significant fall in the pound since the referendum result. Many British expats that have retired overseas will have seen a large cut in their spending power from UK pensions. Similarly, those with rental (or other) income in the UK and those who are planning to sell their UK property to move overseas will suffer. Conversely, expats that are working in the UK, but paid overseas, will be better off. One, often forgotten, consequence of such exchange rate fluctuations is the “currency gains” that UK residents with overseas investment income may see, which can increase the amount subject to UK tax on the disposal of foreign assets.
A significant issue facing many British expats living in the EU, will be the potential loss of reciprocal agreements on EU wide healthcare. A British expat in Spain, post Brexit, may not be able to obtain free healthcare in Spain, nor the UK (unless they spend 6 or more months back each year). In addition, pensions, which are linked to inflation under EU rules, may be frozen, thus eroding their value over time. This is something we have already seen with British expats that have retired to Canada, for example.
For employers with international assignment programs, concern will inevitably be directed to social security issues. If the UK does leave the EU, then reciprocal agreements with EU countries on social security may be lost and new bilateral agreements may be needed. In the meantime, it is quite possible that social security will end up payable in both the UK and overseas country on the same earnings. This is similar to the situation already faced by many employees that are assigned from the UK to a number of other non EU countries, including Brazil. The “double charge” may inevitably have to be funded by the employer, thereby increasing the global assignment costs of sending employees to and from the UK.
Of course, much of this is unknown, but we can be certain that more details will evolve once (or perhaps, if) Article 50 is triggered. In the meantime, we should anticipate a UK Budget in or around October of this year and to expect potential tax increases. Whether these will be in line with the Chancellor’s pre referendum predictions, remains to be seen.