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Family offices and cross-border succession planning during Covid-19

By Camilla Wallace

Family offices increasingly have to navigate the complexities of cross-border legal issues: a necessary side-effect of globalisation. The family office will consequently need advisers on issues such as tax, estate planning and regulation that covers all countries in the mix, and advice on succession planning is increasingly featuring high up on the family office to-do list.

The Global Family Office Report 2019 by Campden Wealth found that 54% of family offices have a formal succession plan in place with the average age for wealth succession being 45 years. However, Covid-19 will be a challenge for these cross-border succession plans.

Tax reforms

Taxes could rise dramatically as governments look to fund huge levels of public debt from emergency measures put in place to shield their economies from Covid-19. The likelihood is that the wealthier could largely shoulder the burden. In the UK, it is rumoured that inheritance tax ("IHT") will be top of the government's list. Its predecessor, estate duty, was increased to a rate of 80% after the Second World War, and with the rate of IHT currently 40%, this would be an obvious revenue raiser, but there are other potential reforms including cutting relief for business and agricultural assets. A wealth tax could also be on the cards.

All of this means that succession planning structures, such as trusts, for UK assets will need to be reviewed and their efficiency for IHT purposes reconsidered. For example, I have many clients who have taken advantage of the current fairly generous IHT relief for business property and whose trusts have invested in shares listed on the Alternative Investment Market as these potentially benefit from 100% relief. If this relief is abolished, or reduced, they will need to consider changing their investment strategy.

Depressed asset values

While the fall in value of assets due to Covid-19 is not good news for family offices, it does present opportunities for estate planning purposes. Assets can be passed down from the current head of the family to younger family members at their depressed values. This could have benefits from a tax perspective. In the UK, the transfer could have no, or a low, CGT cost, and the value of the asset (and its later appreciation) will be outside the estate of the head of the family and not subject to IHT at their death.

Since 2017, there has been no IHT benefit to having a UK property in an enveloped structure, yet since unwinding that structure comes at a tax and administrative cost, many of my clients have chosen to leave their structures as they are. With property prices at a low, now might be a good opportunity to revisit this and arrange for personal use properties to be transferred to younger generations of the family for no or minimal CGT charge, particularly if the "non-resident" CGT rules apply in which case the property can be rebased to its value at 6 April, 2015.

Travel

The travel disruption caused by the "locking down" of many countries at the start of the pandemic could have an impact on the tax residency of family members. For example, in the UK, liability to income tax and capital gains tax ("CGT") depends upon whether you are determined to be “resident” here and a large part of this concept is the number of days you have spent in the country. I am currently advising a family member who is resident in Spain, but has been visiting the UK during the outbreak of the pandemic and has been unable to travel back. It is possible that the extra weeks they are spending in the UK could be enough to cause them to be UK resident for tax purposes in 2020/21.

Days spent in the UK for "exceptional circumstances" can be discounted, and some Covid-19 related circumstances are acceptable, but the rules are not straightforward. If a family member is unintentionally UK tax resident in 2020/21, and has also been so within the past five years, the “temporary non-residence” tax rules could apply meaning that any disposals of assets within that period could be subject to UK CGT. Again, advice will be key, as will, from a practical perspective, careful record keeping, storage of travel receipts and diarising of international movements so that evidence of time spent in each country can be produced when necessary.

Estate planning

Wills for family members should always feature on a family office to-do list, but no more so than during this pandemic. The consequences of a family member dying without a Will could be disastrous for the family from a tax, practical and emotional perspective. Where the family is cross-border, Wills may be needed in several jurisdictions and advice should be taken as a priority. Similarly, powers of attorney should be put in place in all relevant jurisdictions so that the financial affairs of family members can be managed in the event they require time in hospital during the pandemic.

Education

Education is a central component in any succession plan for a family office. If the management of the family office is to be passed down to younger generations, they need the requisite skills and experience, with a view to them sharing the family's goals, vision and management style. Now would be a good time to involve the younger generations so that they can witness first-hand the efficient management of a crisis and be prepared should similar situations come up in future. Such education could be the involvement of younger members on the boards of any family investment companies, or holding companies within a trust structure; it could also be done through participation in family office meetings or those with cross-border advisers, albeit both may need to be done remotely in current circumstances.

Silver linings

The Global Family Office Report 2019 showed that 55% of family offices have been expecting a recession for some time, so many will have contingency plans in place. For those family offices managing a succession of the family's wealth to the next generation, advice is needed on how the inevitable tax reforms across the world will impact their succession plan, but the depressed value of family assets could present some silver linings from a succession perspective and even from an investment perspective for those already in cash.