Greater scrutiny of tax structures and offshore financial centres has increased the pressure on family office advisors to propose schemes for their wealthy clients that are compliant as well as efficient. In this era of increased regulations and transparency, Paul Golden investigates how family office advisors are rethinking their approach to the affairs of the wealthy
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Greater scrutiny of tax structures and offshore financial centres has increased the pressure on family office advisors to propose schemes for their wealthy clients that are compliant as well as efficient.
In the last few years, offshore jurisdictions have come under increased criticism – alongside the network of facilitators such as banks and family offices – for aiding wealthy individuals to avoid tax.
In this new era of transparency, however, many advisors at family offices suggest that not only do their clients pay the correct amount of tax based on their location, but that they often eschew moving to lower taxation jurisdictions in order to maintain their current lifestyle.
Stonehage Fleming partner, Michael Maslinski, observes that family offices will continue to use holding structures (including trusts) for perfectly legitimate reasons, the most prevalent being to pass down family assets for future generations. In many cases these structures will be located in international financial centres, which offer considerable advantages, especially when the beneficiaries are based in a number of different jurisdictions.
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By GlobalData“There will undoubtedly be a reduction in the use of such structures for tax evasion, but most trustees do not accept this type of business,” he says. “We believe the overall use of trusts and companies will continue to grow in line with increases in global wealth.”
Lifestyle and security more important than tax implications
According to Maslinski, lifestyle will usually come well ahead of tax when wealthy families are deciding where to live, unless the tax implications are particularly severe or relocation has only a marginal impact on their lives.
The term ‘offshore’ is a “bad choice of words as it does not really mean anything in law”, suggests Geoffroy Dedieu, CEO of TY Danjuma Family Office. “In view of developments in socially responsible investing and environmental, social and governance, we avoid jurisdictions with a bad reputation, including issues of lax money-laundering regulation or governance or association with irresponsible social practices.”
This view of the use of the term ‘offshore’ is shared by Verfides group head of tax, Terence Pay, who notes that under UK law, UK tax residents who are non-domiciled can legitimately use such structures to shelter personal and business income from UK tax, providing certain conditions are met.
“Tax structuring for such families and their businesses is still important, although a good advisor will steer away from artificial schemes and plan only on the basis of the spirit of local tax laws and underlying commercial realities,” he says. “We must also not forget that that offshore jurisdictions and structures provide many non-tax benefits for wealthy families and their businesses, such as confidentiality and asset protection. These considerations are often much more important than tax mitigation.”
Privacy and security can be significant needs depending on the physical location of families and in volatile political economies there may be legitimate reasons for families keeping money outside their home jurisdiction, according to Holly Isdale, founder of outsourced non-investment family office Wealthaven.
She says her clients are open to paying taxes but want to limit the exposure to just the assets that need to be taxed in that jurisdiction or to limit the tax to the family member who is in a specific jurisdiction.
Confusion still prevalent between confidentiality and opacity
What do the increased regulations and scrutiny of offshore jurisdictions, particularly, mean for family advisors – do they have to rethink their approach to the affairs of wealthy clients? According to Verfides’ Pay, the best advisors will keep track of local legislative changes as well as global initiatives.
“We have entered the era of global automatic information exchange where there is no place for non-compliant or poorly advised structuring,” he says. “Advice has to be sophisticated and tailor-made and there must be substance. Good advisors will already have been doing this, but I suspect we will see a welcome contraction in the market for offshore services sold purely on the basis of perceived secrecy rather than forming part of well-formulated advice.”
TY Danjuma Family Office’s Dedieu reckons some advisors still confuse confidentiality and opacity even though research has shown that complex structures ‘pushed’ towards family offices often embed significant risks. He suggests that the main risk is lack of transparency and that if family offices cannot clearly understand risks and performance they are already running a financial risk of incurring losses and paying excessive (often hidden) costs. “Opaque tax structures also foster risks of fraud by advisors,” he adds.
Graham Reeve, a Melbourne-based family office advisor, is confident that ongoing scrutiny by the IRS and other tax authorities has lead to a significant reduction in the use of complex structures in recent years.
“The leaking of confidential information from previously secret accounts has also meant that taxpayers are now more concerned about using questionable tax structures which in the past may have relied on secrecy and non-disclosure,” he continues. “The IRS requirement for US banks to undertake more compliance on their clients has also meant that some of these banks do not now want to have foreign (non-US) clients.”
‘An ounce of prevention was worth a pound of cure’
Reeve says advisors are less inclined to promote questionable tax structures to their family office clients as these clients do not want the risk, and the promoter can also be subject to criminal and civil penalties for such behaviour. “However, this does not mean that taxpayers do not pursue legal tax avoidance (not evasion) planning strategies.”
In a 2013 report on tax controversies and the family office, Deloitte observed that ‘an ounce of prevention was worth a pound of cure’. Markus Meinzer, senior analyst at the Tax Justice Network, is confident that pressure to deliver effective reform will continue to increase, although he also refers to potential behavioural differences between investors from different parts of the world.
“European and North American ultra-high net worth individuals (UHNWIs) may become more sensitive to reputational risks related to tax, but I doubt that the same holds true for those from emerging economies and developing countries,” he concludes. “However, there is some indication that advising responsible and ethical tax behaviour is becoming more widespread.”
Families will continue to seek the most tax efficient, legitimate option from their advisors and it is inevitable that some will sail close to the wind. However, it is clear that it is getting much harder to do so and those who fall foul of the tax authorities face considerable personal as well as financial consequences.
