Advising ultra-high net worth families
Fiona Nicholson looks at what CAs need to know about advising high net worth families.
Advising individuals on their financial matters can be complicated enough. Advising a wealthy family can introduce many other potentially complex aspects for consideration, including the different needs of different generations, inheritance issues and how best to invest the family’s capital, to name but a few.
So, what do Chartered Accountants need to know when advising high net worth (HNW) and ultra-high net worth (UHNW) families?
Inheritance is always a high priority for discussion. Who inherits what, how much and when are the perennial questions, and changes in the law can have a significant impact, for better or worse.
CAs may therefore be interested to learn that a potential development in legal rights under Scottish law has been stopped in its tracks.
As private-client solicitor, Mark Stewart, Partner with law firm Brodies, explains: “Legal rights have never been applied to heritable property (land and buildings), only to moveable property (investments, cash, contents, business interests etc).
The OTS is talking about the possibility of turnover aligning BPR with capital gains tax, to the point that businesses would need to be categorised as 80% trading to qualify.
“However, there have been two reviews of Scottish succession law by the Scottish Law Commission, in 1990 and then in 2009, which have mooted the removal of this distinction, such that legal rights would apply to a deceased’s whole estate. This was a cause for concern, particularly for landowners and farmers who wished their landholdings to pass to a particular beneficiary.
“But at the end of last year, it was decided by the Scottish Government that this proposal would not be brought forward and this is therefore no longer a current risk.”
While this particular risk has evaporated, there is another on the horizon for some clients, in the form of the second report on inheritance tax from the Office of Tax Simplification (OTS), published in July this year. Stewart points to its proposals on business property relief (BPR), as a potential red flag.
The BPR rules currently state that relief only applies to “trading” companies (where more than 50% of turnover comes from trading, rather than investment). Stewart warns, however: “The OTS is talking about the possibility of turnover aligning BPR with capital gains tax, to the point that businesses would need to be categorised as 80% trading to qualify.”
The OTS report also touches on the possibility of doing away with the relief altogether. Any change to BPR could create the need for some business and financial recalculations, inconvenience, and changes of plan for clients.
To trust or not to trust
Trusts are coming back into fashion, according to Stewart, which he believes is due to intergenerational differences relating to how wealth should be spent.
He says: “The elder generation wants a mechanism through which their family can benefit but not fritter the money away – i.e. trusts.”
Bruce Dodd, Partner and financial planner with Tilney Group, agrees that trusts can be a useful vehicle, although he also warns that they have their downside: “Trusts can be a blessing in disguise or a poisoned chalice. They have a great many uses but are frequently misunderstood. Essentially the word ‘trust’ should be substituted with ‘a gift that you could retain some control over’.”
Margaret Ross, Senior Associate and Chartered Tax Adviser with solicitors Balfour + Manson, explains: “In previous years trusts were fairly informal, but nowadays tighter reporting is required, so there is a need to keep a closer eye on trusts.
“Overseas trustees and beneficiaries are seen as higher risk and come under more scrutiny, so it’s important that anti money laundering records are up to date.”
Family investment companies are becoming more and more popular
Keeping track of trusts is important too, as she points out: “Sometimes people forget they have trusts, so it can be helpful for CAs to add this to their checklists for things to discuss with their clients. It’s also a good time to assess whether the trusts are still required, as their purpose might have been fulfilled.”
Ross adds: “It is also worth noting that, from 2020, most trusts will need to be registered with HMRC.”
Of course, trusts are not the only way to manage family wealth, as Ross Leckridge, Chartered Financial Planner and Associate Director with Johnston Carmichael Wealth, points out.
He says: “One current trend that might be useful for CAs to be aware of is the use of family investment companies, which have a limited company structure, allowing the family members as shareholders to invest cash. Some CAs will be familiar with these, but others might not be. However, we find they are becoming more and more popular, and that solicitors are advocating them.”
He adds: “Some families are more comfortable with this vehicle for passing on wealth than a trust, because, for instance, family members might have been self-employed and so are familiar with the workings of limited companies.
“However, the main benefit is that a family investment company can be more advantageous, tax-wise, than a trust.”
Alastair Creyke, Head of Edinburgh Financial Planning, Divisional Director with Brewin Dolphin, emphasises: “The key when investing money is to ensure that the underlying investment performance and asset allocation is being reviewed on an ongoing basis by a professional.”
CAs should be aware of the cost of investing
Fees and charges are an important consideration for HNW clients too, as Leckridge explains: “One hot topic that CAs should be aware of is the cost of investing, due to MiFID II [the European Union’s Markets in Financial Instruments Directive], which has turned the spotlight on investment charges and fees.
“The trend was going in this direction already, but it has accelerated, and lots more people are using index tracker funds. This can be useful when giving advice on estate planning as the client could potentially save money through the inclusion of some passively managed investments within a diversified portfolio.”
“Evidence-based investment” is a lowcost approach, which shares similarities with passive/index investing and is an alternative to actively managed funds.
Separation of assets
Another way to keep things simple and straightforward is to keep funds scrupulously separate, as Joynt reflects: “Good business practice in any family is to have full separation of family and business assets. A family member taking informal loans from the family business for personal expenditure usually (in my experience) leads to problems.
“This can give rise to tax issues or even employees of the business feeling resentful that the corporate is being taken advantage of, like a family ‘piggy bank’. If the business then has liquidity issues, how is it to recover the monies previously loaned to family members?”
The rise of the family office
Perhaps one of the most significant developments in the HNW family wealth advice sector is the rise of the family office, the choice of many HNW/ UHNW families for managing their wealth.
According to The Economist, it is not just rising but “booming” (“Family Offices Become Financial Titans”, December 2018). The UBS/Campden Wealth Global Family Office Report 2018 (the 2019 version was due to be published on 24 September), based on a survey of 311 family offices, shows that more than two thirds were set up after 2000.
The key is knowing where your knowledge ends and when to discuss with a specialist.
Family offices can take many forms, depending on the requirements of the family. Some may simply require financial expertise, on tax and investment, for instance. Others will also wish to include, for example, charitable giving, property maintenance or general administrative matters.
Family offices are not a new phenomenon. As far back as 1882, Rockefeller had a family office of trusted advisers managing his wealth for him and his family. While single family offices typically manage the wealth of one family, and multi-family offices the wealth of many, the variations between types of family office can be considerable.
HNW families have a diverse range of requirements, and there is much CAs need to be aware of, to advise them effectively, whether through an in-house family office service, working with a client’s family office, or otherwise.
In any case, CAs might find it useful to bear Dodd’s suggestion in mind: “The key is knowing where your knowledge ends and when to discuss with a specialist.”