The trusted family adviser is back in vogue despite misinformation and misunderstanding around tax planning

In the wake of the global financial crisis, the issue of tax transparency has become a political tool of governments across the globe to pursue high-net-worth individuals. John Riches, a consultant member at Withers and co-founder of RMW Law, said as much at the recent award-winning SJ Live 2014 event. According to Riches, private client advisers should begin planning now and “prepare for a completely new paradigm”.

“This is a story that has been running since 2008, but we are now moving rapidly towards automatic information exchange,” says Riches. “That is a huge game changer in terms of how families use offshore structures. A lot of families have completely legitimate compliance structures, but are nonetheless going to be caught in the crossfire of extra regulation and process.”

Armed with extra information, Riches expects that there will be an increase in tax investigations and challenges from HMRC on legitimate arrangements. “People have to make sure that there is proper substance when the taxman comes knocking. We have a window of opportunity to kick the tyres on existing structures,” he says.

Despite many warnings from those in the know, Riches believes that there is a genuine lack of information and understanding within the profession as to how these new changes will impact and when they will surface. “Among the

profession, there is a low level of awareness of how the non-US aspects of the initiative are going to affect offshore structures because it has all been lost in the rhetoric of the US changes. “The tide of information is really only going one way and we have to adapt to that and counsel our clients or we are going to be behind the curve.”

Family governance

Another issue on Riches’ radar is that of successful family governance. “When you are engaged by a client on succession planning you will talk to the client about their will which is all incredibly confidential. However, I am seeing a lot of clients move away from this model and who actually want to sit down with their children and talk about the family’s wealth and the principle about how the money is made and how they would expect it to be used wisely,” says Riches.

“Proactively meeting the heirs and explaining things to them in a big-picture way, so that there are no surprises over what has been planned, is a trend that is starting to develop.” Of course, there are certain challenges in this strategy.

“You have to manage the process carefully. In families that are balanced, it is often fine. It gets more sensitive where a client has more than one family, such as children from a first marriage or step children.”

Such challenging questions could become a real issue if they are not dealt with at an early stage. “What is going to create tension is the lack of communication or a misunderstanding,” claims Riches. “That can be ironed out by sitting around a table and talking about it. Some communication is better than no communication at all. It is an embryonic trend, but it is starting to happen more and more.”

In the area of family businesses, Riches sees new opportunities for private client practitioners. “We have almost gone full circle and come back to the role of trusted family adviser. It is an opportunity to play a wider and more interesting role than just being a will-drafter or a ‘tax man’. We can be involved in a lot of other issues. It is important to help families get their heads around the issue of wealth.”

Wealth policy

Riches suggests that those families with significant wealth should consider a family charter. Such a document would include the principles governing the wealth and how it is to be used, what the family business is and what the role of the family is to be within that business.

“The way to make this most effective is not just to say, ‘Hey kids, I’ve written down the family charter and we believe in these things so sign here’. You need to engage with them,” advises Riches.

“As lawyers, we can work with other professionals to help the clients come together as a family and discuss what their principles are, or should be. What emerges from that is a family charter or constitution that may not be much different from what the founder would have written by themselves, but the rest of the family will believe that they have had a say in it,” he explains.

The issue of what philanthropic gestures can be provided by a family should also be discussed at such meetings as it shapes the family’s policy and can be another way to bring it closer together. “There are some families that involve their children in this from an early stage and have them and a project so that they feel involved and engaged,” says Riches. “Bringing the family in as trustees of the charity so that they are part of it early on helps them feel that they own it.”

Culture change

The idea that philanthropy can be used by some families as a means of tax avoidance or evasion is something of a bugbear for Riches.

“Two years ago there was the issue of capping gift aid relief. It was an own goal by the government who said that charitable giving was being used for tax evasion purposes. There were a number of minor examples that were driving this.

“If you withdrew all the money that wealthy people put into philanthropy and the Arts, then there wouldn’t be a lot going on in London. People make a considerable contribution. It is an alternative to tax relief, but it is not 100 per cent relief and you still have to spend your own money.”

Recent media stories involving high-profile celebrities, such as Take That’s Gary Barlow, have not helped. However, Riches believes that there has been a change in mindset over the last 15 years.

“People used to think that tax avoidance was something that they could engage in, but among my mainstream clients I see zero appetite for it,” he assures. “The tax avoidance industry is significantly smaller than it once was. There has been a huge cultural change and people are concerned about the reputational impact of engaging in tax avoidance.”

Riches is worried by media distortion of the facts. “There is an awful lot of misinformation and misunderstanding around tax planning. We have a system where you are not obliged to pay the maximum amount of tax. Most people are interested in taking advantage of the reliefs that are there rather than aggressive tax avoidance. I think that that is dead and buried.”

This feature was first published in Solicitors Journal: Private Client Focus and is reproduced with kind permission.