What does Brexit mean for expats?
Just over 4.5 million Britons live abroad, with approximately 1.3 million of them in Europe, according to the United Nations. British expats based in EU countries have been living in fear regarding their position given last year’s referendum vote that saw the UK break away from the European Union.
Under Article 50 of the Treaty on European Union, Britain has two years to arrange new deals with EU member states – but in the meantime what should expats, both Brits abroad and EU nationals here, look out for, now the UK has voted to leave the EU? Do they really need to worry? And should your decision to emigrate be affected by Brexit and what is to come from one of the biggest events for the UK ever?
Our very own Nicole and Alex discuss all these questions and more. Read the interview below, or alternatively, watch the webinar here.
What does Brexit mean for expats?
NR: Good morning, my name is Nicole and I am a private client account manager here at Currency UK; I look after the currency and international transfer needs of a range of clients from retirees through to high net worth individuals. It would certainly be true to say that the majority of my clients are current expats or soon-to-be expats. I have invited Alex Coates to join us; Alex is one of our Directors and has been with the company for 13 years. Alex, would you like to give a bit more background to your experience?
AC: Thank you Nicole, yes, and welcome to our audience. As you mentioned, I started with Currency UK some 13 years ago, doing your job actually. Over the years I have witnessed many currency shocks driven by political and economic change and built many long-term client relationships with people who have been expats for decades. Hopefully I can add some longer-term perspective to our discussion today.
NR: Just to give a bit of background about this webinar and to frame the discussion; it is, of course, going to be very much based on Brexit and its impact on expats from a currency perspective. In particular, we will try to point out the risks ahead and how they will affect GBP.
AC: Given our geographic location and market we will focus on GBP as our home currency.
We will steer clear of opinion regarding the Brexit debate and focus on the objective view of currency. It is also worth pointing out that if we do reference something being good or bad, it is in reference to the strength of GBP.
NR: But just in case Alex gets a bit too carried away with the currency element, we will be talking about the non-currency-related impact on expats that Brexit may bring, in areas such as freedom of movement, healthcare, taxation, pensions, and so on.
So, we don’t want to dig up the past but as Mark Twain said: ‘the best predictor of future behaviour is past behaviour’. Alex, maybe you want to talk us through the impact that Brexit has had on Sterling so far? I think we have all seen that pounds buy way fewer Euros and Dollars than they used to, and of course this is impacting expats’ disposable incomes, but what specifically caused this and when?
AC: Well, firstly, you are correct that, in currency at least, past behaviour is the best guide to future behaviour, but we won’t just look at what has happened for the sake of trying to estimate what may happen in the future. It is important to highlight the causes and the typical reactions of GBP to types of news so that, moving forward, hopefully our listeners will be able to equate the news to the impact of their finances (at least the element that is currency related).
NR: So, for example, they’ll read a headline and think ‘oh that should improve the GBPEUR rate a bit and improve my pension transfer?
I will now point out the following obvious blips…
The referendum announcement, the Brexit vote, triggering Article 50, the recent general election.
It is certainly clear that, as I am sure you are aware, Brexit is bad for the value of GBP. That is to say that the financial markets sell GBP when the probability of a complete and total Brexit is high and visa versa.
NR: But why do the financial markets do that?
AC: Well, currency moves in relation to interest rate expectations. Hedge funds, pension funds, etc want to hold their money in a currency that gives them a good interest rate.
Loosely speaking, the interest rate is correlated with the economic state of a country; fast-growing economies tend to have higher interest rates than slow-growth or stagnant economies. It is expected that Brexit will lead to slower growth in the UK, at the very least because of the uncertainty it causes, and thus GBP is sold and it gets weaker, buying less EUR/USD/AUD/CAD.
NR: So it is a bit like looking for a new bank account, you will be attracted by the ones offering the highest interest rate. And you would take your money out of the old account and into the new account with the better interest rate.
AC: Another way of thinking about Brexit, now that the Brexit ‘Yes or No’ option is a distant memory, is that any mention in the press of soft Brexit is good for GBP – as we saw last November where the fall in GBP related to the announcement of when article 50 would be triggered was partially mitigated by the High Court ruling that the final Brexit deal would have to be passed by Parliament.
Without going into too much detail, this basically highlights that the financial markets are also looking at the degree of Brexit.
NR: So Alex, can we flesh this out in some numbers? How much has GBP fallen because of Brexit and how much further could it go?
AC: So headlines talk about GBP falling to a 30-year low when you take into account the US dollar, Aussie dollar, and Euro. This is a bit misleading as it implies that GBP vs USD is the result of Brexit – when actually it is the result of the US leaving the financial crisis before us and starting to raise interest rates.
Looking at the graph and rounding for simplicity, we can see that since February 2016 when the then Prime Minister David Cameron announced the EU referendum, we have seen a fall in GBP’s value versus EUR of around 11-12%, and in that time we have also had an election.
So going back to your Mark Twain quote, if we were to put that in the context of the past then the financial crisis really dwarfs Brexit in regards to its impact on GBP, and also gives us some indication of how low we could go.
The financial crisis effectively saw GBP’s value versus Euro fall by 30% – with all that was happening then, the low was 1.02 on 31st December 2008.
As such, we can see that past performance, albeit under much more challenging conditions, suggests that GBPUSD could fall to 1.02 (virtually parity), so that should be our benchmark now. Not a prediction or forecast, but simply something we know could happen because it has happened before. So that is approximately 9-10% lower than the rate now.
NR: So, as an expat or potential expat you need consider what proportion of your income is sensitive to currency movement, figure out if GBP weakness is good or bad for you, then consider what impact a 10% swing would have on your overall income and lifestyle?
AC: Exactly – and then maybe have a think about what you can do about it.
NR: Well, when you say ‘what they can do about it’ you mean ‘how they can protect their income from currency swings’ rather than how they can change Brexit!
AC: Yes indeed! *laughs*
NR: Now, the title of this Webinar is how Brexit will affect expats and, although our expertise is in currency, there are of course many areas that Brexit will significantly impact, some of which will be affected in the opposite way to the currency move.
AC: For example?
NR: Well, we will talk about the big things later, but actually what I had in mind was how a weak Pound was actually good for expats looking to return to the UK (regardless of Brexit).
Let me explain with an example. If you bought a property in Spain pre-2007 that was worth €350k, that would have cost you £233,333.33 at a rate of 1.50, but since then, property value in Spain has seen a 41% drop, meaning the property would now be valued at €206,500. If you were to bring back €206,500 to the UK in 2007 you would have got £137,666.67, but at today’s exchange rate of about 1.13, that would give you £182,743.36. As you can see, the fall in the value of GBP has partially mitigated the fall in overseas property values. If Brexit does continue to decrease Sterling’s value, this at least gives some comfort to overseas property owners planning to sell and come to the UK. Also, if you are buying abroad now, even though the exchange rate is a lot worse, the property price will be less to begin with.
AC: Very True – well let’s have a talk about the big non-currency impacts shall we?
NR: Well I guess the biggest issue right now is the ‘right to remain’, both for Brits in the EU and visa versa.
Most of the Expat hotspots in Spain, France, and Italy would certainly suffer significant economic stress if the British expats were forced to leave and there does seem to be a general vibe of ‘we will be fine to stay’.
But simply having a right to remain is not the sames as having default access to the state systems. This will be of particular concern to the 100,000+ British pensioners living in Spain.
The prospect of paying for healthcare would certainly have a big impact on their budgets in the context of the currency-led fall in the value of their pensions.
AC: Not to mention poorly performing pensions and pension freezes in the UK but actually also the risk of losing the index-linked element. Under EU law, the UK state pension is index-linked, so if you move to Europe it rises in line with inflation. Some Expat campaigners are concerned that if a replacement guarantee isn’t put in place when Britain leaves the EU, it could be frozen at the point you start claiming it, as it is in some non-EU countries.
A one-size-fits-all solution from the perspective of the EU with regards the right to remain will be one of the largest sticking points of the negotiations as it is one of the areas in which there will be the least consensus from the EU member states.
NR: Shall we use some examples to make this point?
AC: Yes. Well, looking at our chart, the 1 million Polish people living in the UK (the majority of whom are of working age) and the very few UK expats in Poland will drive the Polish government’s focus very differently to the that of the Spanish government, who have 400,000 Brits living in their country.
Pensions are not going to be a concern for Poland whereas healthcare and pensions will be a huge concern for Spain.
NR: I guess tax will be another factor where motives will vary dramatically?
AC: Yes, a good example will be France where capital gains tax is 14.3% higher (19 -33.3%).
The UK has 120 double tax treaties so double taxation is unlikely unless one of the treaties needs to be renegotiated as part of trade agreements.
Currently, inheritance rules allow individuals to choose whether their assets receive local or UK treatment (presumably choosing the treatment with the lowest bill) – this allowance will likely be lost.
Arguably the most concerning area is social security, though you may not consider it a tax, this could become payable in multiple jurisdictions and/or could result in the loss of credit for overseas pension contributions and so on.
NR: Taxation – basically a minefield as ever!
Alex can we just talk a bit about investments – I am conscious that the strapline to our webinar is ‘how will Brexit affect your money, currency, and investments’.
AC: Well sure: It’s a big topic but let’s try and whittle it down:
Obviously, currency will affect your investment if the investment is in a different currency (as with the 1 million EU homes owned by Brits).
Taxation can definitely affect your investment – certainly from the initial planning – we have talked a bit about this but the impact is in the decision-making process rather than on the investment itself.
But really the area that will be most affected is investments that are linked to British or EU-specific businesses, products, or assets (investment categories).
The more specific the investment (including pensions), the more susceptible to volatility they will be – and that volatility is going to be fairly correlated with economic performance which, as we discussed, is significantly affected by the uncertainty that Brexit brings.
NR: So can I ask you about investment related to the FTSE? I have seen numerous stories about the FTSE doing really well – particularly after the Brexit vote.
AC: Great shout! Well, life does seem to take with one hand and give with the other. So looking at that example, the FTSE actually rallied so significantly because of the fall in GBP – most of the companies that make up the FTSE 100 are large multinationals with significant overseas revenue streams. As the value of the Pound plummeted, the value of these overseas earnings increased and thus improved the value of the firms. So, if your pension included a selection of blue-chip shares then it would have improved in value …
NR: But if you are transferring that pension abroad then you would have lost the value in the exchange rate anyway?
But in broader terms, the uncertainty of Brexit will impact the value of all EU-centric (including UK) investments. Currency fluctuation just adds another risk to them.
NR: Let’s go through some of the likely models the UK will adopt post-Brexit:
AC: There are three models based on existing countries and how they trade with the EU and the world generally.
The first we will call the Norwegian model. Norway is part of the European Free Trade Association (EFTA), meaning it can access multiple global free trade agreements, including being part of the European Economic Area (EEA). EEA members have access to the EU single market and must abide by the rules and restrictions it imposes – these include the four fundamental freedom: movement of goods, movement of workers, movement of capital, and provision of cross-border services. Since these four fundamental freedoms are part of the motivation for Brexit in the first place, it is unlikely that the UK will adopt this model.
The second is the Swiss model. Switzerland is a member of EFTA but not the EEA; therefore, Switzerland’s access to the EU single market comes in the form of regularly updated bilateral agreements. The EU isn’t in favour of this type of arrangement, however, calling it ‘unwieldy’, and thus it’s unlikely they will agree on a similar deal for the UK.
The third and final model we shall call the Canadian model. Many countries come under this model, Canada is just one of the countries that fall into this category. These countries form trade deals with the EU through organisations such as the World Trade Organisation and the G20. After Brexit, the UK will remain a member of these organisations and will be able to negotiate deals through these forums just like many other countries do. So the Canadian model isn’t a model as such, it’s just using other existing agreements, treaties, and organisations to negotiate. A ‘catch-all’, if you will.
NR: So, would you say the Canadian model would work best for the UK?
AC: In short, yes. The Canadian model gives us an idea of how we would go able setting up trade deals with the EU post-Brexit. The difficulty is, there is a large amount of time between now and fully leaving the EU, during which we need to actually agree on Brexit terms with the EU – and anything could happen.
NR: While we’re on the topic, I’d like to mention a couple of key dates for our audience to be aware of in the coming months.
October 2018: Both sides want to conclude negotiations six months before Britain actually leaves the EU. This will give the House of Commons, House of Lords, the European Parliament, and other national assemblies time to validate and confirm the final deal.
29 March 2019: Britain must leave EU by this date*. A transitional period to avoid cliff-edge changes is expected to begin.
(*Unless there is a unanimous decision by all 27 remaining EU members and the UK to extend Article 50 negotiations beyond the two-year time limit given by the Lisbon Treaty).
Okay Alex, that brings our discussion to an end. Thank you very much.
If you have any questions on anything mentioned here, don’t hesitate to give us a call on 020 7738 0777.