Family Offices are, like the rest of the world, reacting to recent market events. Words like “stellar growth”, “alpha” and “tax avoidance” are giving way to more mundane words like “custody,” “security” and “prudence.” This is across all aspects, be that investment, tax planning or otherwise. While this may, in many cases, have resulted in changes to investment strategy and an increased awareness of systems and custodian aspects, there are deeper changes that family offices need to be aware of.
The approach of tax authorities around the world is changing. For example, we have seen recent announcements by the UK authorities of their agreement with overseas jurisdictions such as Liechtenstein.
Tax authorities are becoming much more sophisticated and “commercial” in their approach to taxpayers. This takes many forms. For example, in the United Kingdom, it is considered that HMRC is now much swifter to close loopholes and challenge what it calls or regards as “aggressive” tax planning with retrospective legislation. At the same time the HMRC is increasingly looking to understand the needs of the very wealthy and to place those “clients” in specialist divisions. There is truth in HMRC’s claim that this will ensure these clients receive a better service. Nevertheless, individuals are nervous about this development and what it may mean for their tax affairs.
It is imperative family offices understand how they will deal with, manage and interact with the tax authorities around the world. They should form and draft principles at the outset, perhaps in conjunction with professional advisers. It is suggested that investing time and effort in preparing a written policy will be repaid many times over.
These principles would address a number of issues. Of primary importance is to establish an individual approach to tax avoidance. How aggressive will the family wish to be, and how far will they undertake transactions for the sole purpose of avoiding taxation? Some families will only undertake any tax planning if it is commercially driven and essentially only look at tax planning as part of a structure. There are other families however who find any tax burden too great and will go to any legal length to avoid it.
Each strategy is fine, provided it is in accordance with the law and the established principles of that family. What is not fine is if the family does not know where it stands on the spectrum. If these principles are not encoded in a family statute, which is followed closely by their advisers, their employees and their business deliverers, then problems will inevitably follow. The family office will find itself not able to deal with tax as a business issue and dangerous errors may arise. There may also be a commercial impact. If a family honours its tax strategy it can move quickly and with certainty. The position does not need to be revisited every time an investment has to be made.
The family should also understand how it is to interact with the tax authorities. Do they want to arrange to be a high profile family, looking to get the tax authorities blessing on all their transactions in advance, or are they one to keep out of the eye of the public authority, relying solely on their professional advisers for guidance? These principles need to be thought through, the implications discussed and then the result established with a code the family follows.
There are also generational issues to consider. A strategy is business protection. If the principles are well known within a family then there will be increased security when passing assets between generations or where a family member moves across international borders.
A code of principles can also add commercial security: certainty in tax is a golden asset.
