London: Family Office Capital of the world?
London’s Family Office (FO) sector has seen rapid expansion in recent years. This continuing build-up of FOs has produced what is also referred to in Silicon Valley as the 'Cluster Effect'.
In other words, the momentum of FOs setting up in London is such that it attracts other FOs to London simply on the basis that they want to be close to their own kind.
This also means FOs are just a short walk away from sharing ideas, interacting and on occasion doing deals with similar private closely-held organisations to their own.
Outside the wealth community who are "in the know", the FO sector keeps an intentionally low profile, yet contributes vastly to the UK economy and industry. However, with changes to the UK environment is London jeopardising its world-leading status?
Key considerations when setting-up a Family Office
Generally, FOs exist principally to preserve and grow family wealth through the generations.
These FOs are the primary custodians of family principal and unleveraged capital that think long-term and determine their own investment destinies, without the strictures of quarterly reporting to investors, bondholders or shareholders as is the case with other financial institutions.
While the specific reasons families establish offices are as numerous as the offices themselves, the most fundamental reason has to do with the challenge of ensuring proper ongoing stewardship and 'agency' theory: no one will take the specific families challenges and issues as seriously as the families themselves and by extension those they employ.
The global financial crisis and its aftermath brought this into sharp focus for many families, who are still dealing with the aftershocks. In addition, increasing geopolitical and currency risks make London an increasingly attractive jurisdiction to base your FO.
More recent global developments include the need to balance sufficient transparency (whilst retaining the legitimate right to privacy), cyber security issues and also reputation management which goes hand in hand with good family and FO governance.
Beyond these general factors, the key consideration for establishing any FO is to focus attention on the unique needs and idiosyncrasies of the family itself, whatever those needs may be and however they might evolve over the generations.
It may therefore be important to consider not only the preservation and generation of capital, but also philanthropic initiatives educating the next generation about the responsibility that comes with inheriting wealth.
The above, together with their long-term multi-generational perspective, makes FOs unique.
London: the prime location for international Family Offices
As mentioned above, London is increasingly being viewed by internationally based families as the location of choice for the setting-up of their main office.
Various factors influence the choice of jurisdiction including:
- access to high quality professional services (including legal/accounting)
- access to world class investment advisers and managers
- security and protection of privacy
- protection of the rule of law (including the tax and criminal law regime)
- transparency with FO counterparties, including financial intermediaries
- highly regarded financial regulatory regime
- stable local currency and government
- access to private banks and banking relationships, and
- ability to recruit and retain high quality FO staff.
The UK and in particular London scores highly in relation to all of the above key metrics.
The increasing global geopolitical instability should only reinforce London’s attractiveness as ever greater flows of private (family held) capital move to safe harbour jurisdictions with stable systems and a strong rule of law, as epitomised by the UK.
The continuing flow of FOs setting up in London is testament to its prime attractiveness among competitor FO location jurisdictions, for example, Switzerland and Singapore.
This is evidenced by the increase in the number of South American families deciding to base their FOs in London (in place of the traditional bases within the US, notably Miami).
The value to London
FOs in London are concentrated in Mayfair, particularly Dover Street and Grosvenor Street, but can also be found in parts of Knightsbridge. In contrast to the media headlines, these FOs are not contributing to the 'lights-off' trend in London’s high-end residential property sector.
These FOs are 'lights-on', existing to fulfil the day to day requirements, objectives and desires of the families they are employed and paid to represent.
The remit of a properly set up, full service FO is very broad and ranges from instructing professional services firms (for example, law firms) in relation to asset acquisitions/disposals (sometimes to other FOs), to dealing with the Mayfair residential household employment agreements and country estate gardening/staffing issues.
For confidentiality and other operational reasons FOs are sometimes split between the business office on one floor and the private/personal office on another floor.
Fees generated and paid by FOs, while difficult to track given their privacy, are very real and are visible to professionals that interact with and service FO clients across their myriad needs and transactions.
FOs rely on professional services firms, banks and often self-styled 'Private Offices (POs)'.
Proposed tax changes RE:foreign domiciliaries - is London in jeopardy?
We in the UK are often unaware of the individuals and families behind these FOs. They typically relish discretion, and become resident in the UK without fanfare. However, we could risk them leaving just as quietly.
If there is an exodus of such individuals, the impact on the UK will be felt.
In the Summer Budget of 2015, the Government announced various reforms to the taxation of foreign domiciliaries (so-called 'non-doms'), potentially offering not only those who are UK resident and currently use the remittance basis, but also those who are non-resident but are indirect owners of UK residential property.
However, the proposals in relation to remittance basis users stopped well short of Labour’s plans to abolish non-dom status.
From April 2017, certain long-term UK residents who are domiciled outside the UK will be deemed domiciled in the UK for all UK tax purposes, which will preclude use of the remittance basis.
However, it appears that such individuals will continue to have access to a pretty generous regime, provided that wealth is transferred to trusts before the acquisition of deemed domiciled status.
With the benefit of good advice and careful planning, the UK is likely to remain a very attractive jurisdiction of residence for individuals in this category.
Moreover, the proposed changes to the personal tax regime for foreign domiciliaries should not affect the advantages of having a FO based in London, for the reasons discussed above and further below.
Simultaneously announced were further reductions of the UK corporate tax rate from the current 20% to 18% (until 2020), making UK company tax rates among the lowest in the OECD.
This will increase the attractiveness of basing an FO in London given that many FOs are structured as UK resident companies.
The blossoming of the London FO sector is likely set to continue, in particular given the continuing rule changes being proposed at both the OECD and national governmental levels from transparency to taxation.
This together with the increasing geopolitical, currency and debt (both private and sovereign) risks in many regions around the world, together with the focus on the levels and concentration of private wealth in such regions, will increase the attractiveness of London as a 'safe harbour' for international private wealth.
For more information, please contact Ashley on +44 (0)20 7427 6630 or firstname.lastname@example.org.
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