These families exhibit very specific characteristics: being extremely mobile and multi-jurisdictional, looking to expand not only their families’ personal experience but also grow their business on a worldwide basis.
The increasing global drive for tax transparency, regulation and disclosure means there is a particular need to co-ordinate the administration of such families’ affairs, segregate the riskier business assets from personal holdings and to preserve confidentiality in relation to the families’ affairs. Holistic planning is vital. If structured correctly, a family office can achieve and facilitate these objectives, dealing with the challenges that currently face wealthy families.
Why will a family choose the UK as the base for its family office? Firstly, the UK remains one of the top financial and wealth management centres in the world. Secondly, in our experience, given the nature of the emerging market jurisdictions, UHNWIs from these areas are looking to ‘other’ jurisdictions (such as the UK) to invest in, to settle, to educate their children and to centralise their affairs. Thirdly, the jurisdictional choice of a family office is usually determined first and foremost by the location of the key family members and their personnel or key advisers. London’s accessibility to and from the rest of the world, its attractive investor visa programme, favourable time zone, political stability, the fact that it has access to a range of professionals and services with the experience required to support any family office, are all reasons why a UHNWI may wish to establish a family office in the UK.
Once the decision to locate in the UK has been made, the family will need to consider what type of family office they intend to have, who they wish to run the family office and the services that the family office should offer. The proposed services may well inform the choice of this individual or indeed range of individuals employed by the family office as well as the structures that will be serviced. Particularly given that the UK is a high tax jurisdiction, care will need to be taken in deciding who does what to ensure the involvement of a UK based family office does not cause any adverse tax consequences. Clarity as to responsibility and decision-making processes is required at all levels at the outset and must be adhered to on an ongoing basis. Setting up the perfect legal structure means nothing if it can’t work in practice or isn’t adhered to.
Family office interaction
A variety of different family office structures have evolved over recent years, including single, multi and even virtual family offices (normally dictated by the family’s desire for privacy, independence and their financial commitment to running a family office). The services provided by the family office can therefore be as wide (providing investment management, accounting, concierge services or even dealing with the family’s art collection) or as narrow as is desired by the UHNWI and their family.
If the family office is to provide services to offshore structures, it will be necessary to consider the tax implications and impact of providing these services in the UK for those structures. In our experience, family members often want to be involved in decisions relating to investment management and key assets, which can give rise to central management and control issues in relation to the structures holding those assets.
Tax considerations
Non-residents are chargeable to UK tax in respect of income from a trade conducted in the UK through a branch or agent, in the case of income tax, or a permanent establishment in the case of corporation tax. However, the investment management exemption (the ‘IME’) enables non-residents to appoint UK-based investment managers (such as multi-family offices offering investment services) without the risk of UK taxation.
There are various qualifying conditions to be considered, such as independence, the ‘20% test’ and remuneration at a customary rate, where family offices may be most at risk of failing to satisfy the requirements for the IME to apply.
For UK income and capital gains tax purposes, a person who is non-resident (such as non-resident trustees) will be deemed UK resident (for the purposes of the trustee residence test) where the non-resident acts as a trustee in the course of a business the non-resident carries on in the UK through a branch, agency or permanent establishment in the UK. This can also be relevant to the family office.
Current HMRC guidance sets out factors
it views as being relevant in determining whether this test is met, including whether the ‘core activities’ of the trustee are conducted by the UK branch, agent or permanent establishment. These activities include the general administration of the trust, the over-arching investment strategy, monitoring the performance of those investments and decisions on how trust income will be dealt with and whether distributions should be made. Care therefore needs to be taken when deciding the activities that will be performed by the family office to ensure the performance of these activities in the UK does not bring the entire structure onshore for UK tax purposes.
Furthermore, it is also necessary to consider whether activities are carried out in the UK by a dependent agent. Where the services provided to the trust are only those that the person is contractually obliged to provide under their agreement with the offshore trustee and are remunerated at arm’s length then this is unlikely to create a dependent agency permanent establishment. Therefore, it is important the family office is paid an arm’s length fee for services provided.
One practical issue will be whether the family office will be run as a cost centre
or whether it is intended it will generate a profit. The UK tax implications of funding as well as generating profits will need to be considered in order to ensure the office is properly structured to ensure tax efficiency and compliance with any payroll taxes or VAT. Processes in family office compliance can lead to wider ranging enquiries into the family structures.
Risk Strategies
The UHNWI will also need to consider putting in place risk mitigation strategies in relation to the family office, just as they would with their asset-holding structures. Where one main individual runs the family office, key man provisions should be put in place and a clear strategy will need to be developed to ensure continuity and succession when that individual ceases to run the family office. As previously mentioned, it is vital the family office does not jeopardise the confidentiality of the UHNWI’s affairs. It is possible to reduce the risk of inadvertent disclosures by the use of appropriate structuring and third party contracts when the office is established, for example confidentiality agreements and the establishment of clear guidelines and policies in terms of data protection. Lastly, it is important that, while the family office and the UHNWI’s asset-holding structures work together, the family office is physically segregated from these structures so that any risks associated with family office structure should have no impact on the rest of family’s structures.
With careful structuring, a family office can be a useful addition to the family’s wealth management toolkit. The family office can successfully locate in the UK within the needs and requirements of most families provided that advice is sought on an ongoing basis and it is structured to be as flexible as possible. The tax changes that will be implemented over the next year by the UK government with respect to UK resident, non-domiciled individuals and the increasing favourability of the investor visa regime means that now is one of the best times to locate the family office to the UK.
