Planning for tax volatility is crucial for family offices, given their often significant international exposure across a broad range of commercial interests, bankable investments or tax residence of family members. This paper looks at each tax area for consideration including: Corporation, Personal, Income, Inheritance, Capital Gains, Green, Social and Wealth Taxes. It puts forward recommendations that many family offices may need to consider when identifying and managing their current and future tax exposure, in an increasingly volatile tax environment including:
- Reviewing existing wealth structures to ensure that they are still “fit for purpose” and fully up to date regarding all tax compliance requirements. Consider tax structuring for all commercial transactions
- Identifying where there is a divergence of opinion between generations in attitudes towards tax and help to build a consensus
- Ensuring that governance frameworks within the Family Office and related entities/businesses, help to effectively manage tax risk in a transparent manner
- Be mindful of the reputation of the Family Office and how good tax governance and transparency can significantly enhance a Family Office’s reputation. This is an increasingly important factor when participating in a process to acquire highly sought after assets
The debt/GDP ratio jumped during the pandemic and during the GFC, and even austerity did not put a big dent into it.
Sources: IMF, HSBC Global Private Banking as at 10 October 2021.
Most families do not have the same leeway as governments to run up debt. Many countries have seen their debt loads reach new highs, both from an absolute perspective and relative to their income (or to GDP).
Of course, there is a valid excuse. The pandemic was exceptional, leading to a surge in spending, tax cuts and transfers that together often exceeded 10 per cent of quarterly GDP. Support for companies and households helped them bridge a very difficult period and reduced the number of bankruptcies and personal defaults we would otherwise have seen. The bulk of these exceptional support measures will be temporary, but investment in healthcare, for example, will need to continue. Global ageing has not stopped, and the pandemic has illustrated that there has been a chronic underinvestment in many countries’ health services. A probably even bigger area of public sector investment will be in climate mitigation and adaptation.
While spending and investment rose during the crisis, tax revenues fell. They are still lower than normal, as many companies are still recovering and supply chain issues hamper activity. Labour markets are showing shortages in some places, but for many workers, the transition to new jobs may take time as it often requires new skills.
Tightening fiscal policy seemed premature and dangerous so far, but some countries’ GDP level is now back to the pre-crisis level. Quantitative easing “QE” also made it less urgent for governments to address their debt load, because it has removed some of the market discipline, especially for developed market sovereigns. But as QE programmes come to a gradual end in the US and the UK, some of that market discipline may return.
It may not be a coincidence, therefore, that the US and the UK have now started to signal to voters and markets that their deficits need to shrink, through spending cuts and tax increases. The latest US budget reconciliation bill proposes that the additional spending will be partly paid for by taxes on companies and higher earners. In the UK, the government has introduced a new health and social care levy from 2022, the withdrawal of the super deduction investment incentive and a 6 per cent hike in corporation tax in 2023. In the EU, there may be less urgency to raise taxes as the EUR750 billion Next Generation EU fund can help fund expenditure. And in China, targeted fiscal support measures for the private sector are expected to remain in place. But in several emerging markets where deficits rose from 2020 to 2021, fiscal consolidation is being promised to markets.
So while there seems to be a gradual return to some fiscal orthodoxy, the extent and the speed of it varies by country. Tightening both fiscal and monetary policy at the same time can hurt activity and market confidence, and it is one of the reasons why we expect the US and UK central banks to end their cycle of rate increases after just 2 or 3 hikes.
How much will come from the taxes (i.e. the income side) will vary by country too. Politics may play a part here, the judgment of what is fair, and the lessons learned from austerity following the great financial crisis. The US and the UK plans include some of the possible trends we could see: taxes on higher earners, wealthy households or large corporations to pay for transfers to the less fortunate and for investment to address the demographic trends and climate crisis. Carbon taxes are another area that will be interesting to watch. As interest rate costs are bound to rise at some point, and global ageing will result in lower tax collection if nothing is done, it seems unavoidable that tax rates will be on the rise for some time to come.
Against the backdrop of the above, family offices face increasingly complex scenarios when planning for their founders and key family members - who are often globally mobile, with the ability to be resident in any number of jurisdictions, but often with a preference as to where they decide to settle.
Recent elections in the UK, US and Germany have seen battle lines drawn over taxes, the perception of fairness and simply governments needing to raise revenue to fund election promises and recover the cost of the pandemic support they have provided to households and businesses.
Globally there is a focus on corporation tax. The OECD announced in July 20211 that 130 countries and jurisdictions have joined a new two-pillar plan to reform international taxation rules and ensure that multinational enterprises pay a fair share of tax wherever they operate.
A recent example of this is the UK, which announced in its most recent budget that corporation tax will increase from 19 per cent to 25 per cent from April 2023 - where profits exceeded as little as GBP250,000 per annum. Perhaps more telling was that this rate was also to apply to companies used to manage family investments.
Even with a corporation tax rate of 25 per cent the UK remains competative, research from the Tax Foundation2 shows that with the average corporate tax rate, measured across 177 jurisdictions, is 23.85 per cent. When weighted by GDP, the average statutory rate is 25.85 per cent.
Drive for transparency
The latest OECD initiative on corporation tax simply drives home the direction of travel. Global initiatives such as CRS and FATCA all underline the focus that governements have on ensuring their residents (or citizens) are correctly declaring income, gains and their wealth generally.
Families who organise their finances through family offices, often manage their wealth with structures that have been designed to smooth the transition of this through multiple generations, may find themselves subject to increasing levels of scrutiny.
With the transition of wealth to the next generation over the next 10 years, estimated to run into the trillions3, it is anticipated that families will be revisiting their structures to ensure that they not only remain compliant with all global and domestic initiatives, but that they are consistent with the vision and values that the next generation have for the family wealth which may well be different to that of the previous generation.
Globally governments have moved away from supporting businesses and households, as they did during the first half of the pandemic, when the focus was on providing relief. Whilst the effects of the global pandemic have begun to ease the global trend is clear. Tax policy reforms have to be expected as do tax increases, as governments seek to recover the costs of the support that has been provided and to invest for the future.
Here the playing field is far from level. Some jurisdictions apply rates of income tax close to 56 per cent whereas others apply a 0 per cent rate to income and gains4.
Those in control of tax policy have to balance the global mobility of their wealthiest residents; the perception of tax fairness versus the reality that in order to raise meaningful levels of revenue it is by increasing the median rates of tax (where the overwhelming majority of taxpayers sit) that will have the greatest impact in terms of raising revenue, and therefore such an approach may be viewed as socially unacceptable.
Research again shows us that increasing tax rates5 often has the effect of actually collecting less revenue than at lower rates, those with high levels of wealth adjust their behaviour, refining the approach for policy makers is therefore far from simple.
Furthermore, the landscape for wealthy individuals and families is competitive, many countries offer special tax regimes to those who are prepared to pay annual contributions to the tax authorities in return for access to favourable tax regimes.
With countries such as Italy and Greece introducing their own special tax regimes for those relocating there (provided the certain conditions are met) the landscape is becoming increasingly competitive. The UK has the remittance basis of taxation, which has been subject to a number of changes in recent times, but this is expected to remain in place and unchanged, at least for the term of this parliament and perhaps the next (assuming a workable majority for the Conservative Party at the next election).
Estate and Inheritance Taxes
Often family offices are established as a means to manage the interests of an individual or their broader family. As time passes the focus often moves to succession, to the next generation, and with that concerns over how the beneficiaries may be taxed and if the structures used to manage the wealth and succession are appropriate, or if they should be refreshed.
Again the playing field is far from level. Some jurisdictions do not levy any estate or inheritance taxes, with others charging rates of 60 per cent and beyond6.
In the UK, where inheritance tax is generally payable at 40 per cent (on all but a small proportion of the estate), there have been various reviews of the inheritance tax system all with a view to refreshing this tax and perhaps driving tax receipts from this tax upward – it currently raises very little in the way of revenue, when compared to say income tax. Families offices would be well advised to ensure their arrangements are reviewed regularly and refreshed as appropriate.
Capital gains tax
Some jurisdictions treat short term gains like income and tax them as such, whilst offering a deduction based on length of ownership or apply different rates to different types of gains.
In counties where there is a significant disparity, such as in the UK (45 per cent income tax versus 20 per cent or 28 per cent capital gains tax), capital gains tax may be considered low hanging fruit.
Should capital gains tax rates rise in counties such as the UK, then family offices may increasingly look to new vehicles to manage the family wealth, such as POEICs or SICAVs, which allow the investors to control tax points and roll up capital gains within the investment wrapper.
The pressure on healthcare services at the height of the pandemic was evident, with essential treatments being unavailable as those caring for CV19 patients simply did not have the resources (or capacity) to provide what might be considered to be a basic level of care in many nations.
Taxes to assist with funding healthcare provision is certainly not a new concept. Many countries already apply specific levies, sometimes referred to as contributions under this guise. The question policy makers will be asking themselves “is there scope to increase these”. The answer appears to be yes. Most recently in the UK (a country where national insurance contributions are perceived as assisting with the funding of healthcare services) they announced a new social and healthcare levy of 1.25 per cent, which will apply to employees, employers and dividend income, with the revenue this new tax raises being earmarked for social and healthcare.
Generally, wealth taxes are politically popular, only impacting a small percentage of the voter base and in some countries payable by those who are unable to vote but have assets there (most commonly for real estate).
Perhaps the French model of seeking to only tax real estate removed (to some degree) the complexities that tax authorities face in valuing assets, or implementing a one off wealth tax, as proposed by the (self-appointed) UK Wealth Tax Commission8.
As the revenue raised by taxing fossil fuels continues to drop and other forms of transport, such as electric vehicles, become increasing popular and accessible, then perhaps the government will look to tax these methods of transport in some way.
Clearly it is impossible to predict how policymakers will decide to tackle the issue faced by unprecedented levels of borrowing, however, it is clear that doing nothing is unlikely to be an option.
Given that many family offices will often have significant international exposure, whether it be in respect to their commercial interests, bankable investments or the tax residence of individual family members, it would sensible to:
- Review existing wealth structures to ensure they remain “fit for purpose” and fully up to date regarding all tax compliance requirements
- Consider tax structuring for all commercial transactions
- Identify where there is a divergence of opinion between generations in attitudes towards tax and ensuring that governance frameworks within the Family Office help to effectively manage tax risk in a transparent manner and build consensus
To be mindful of the reputation of the Family Office and how good tax governance and transparency can significantly enhance a Family Office’s reputation.
1Date: 01/07/2021. OECD Webiste. Article: 130 countries and jurisdictions join bold new framework for international tax reform, OECD ↩
2Date: 09/12/2020: taxfoundation.org. Article: Corporate Tax Rates Around the World, Tax Foundation ↩
3Date: 26/06/2019. Wealthx.com. Article: A Generational Shift: Family Wealth Transfer Report 2019 ↩
4Date: 2020. Stats.oecd.org. Article: Table I.7. Top statutory personal income tax rates. Date: 2021. Home.kpmg. Article: Individual income tax rates table, KPMG Global. ↩
5Date: 22/08/2017. Ifs.org.uk. Article: How do the rich respond to higher income tax rates? ↩
6Date: 15/0/2021. Oecd-ilibrary.org. Article: Inheritance, estate, and gift tax design in OECD countries | Inheritance Taxation in OECD Countries ↩
7Date: 2018. Read.oecd-ilibrary.org. Article: The Role and Design of Net Wealth Taxes in the OECD, OECD iLibrary ↩
8Date: 2020. Wealthandpolicy.com. Article: A wealth tax for the UK, Wealth Tax Commission ↩
The following may be subject to local requirements.
This is a marketing communication issued by HSBC Private Banking. This document does not constitute independent investment research under the European Markets in Financial Instruments Directive (‘MiFID’), or other relevant law or regulation, and is not subject to any prohibition on dealing ahead of its distribution. HSBC Private Banking is the principal private banking business of the HSBC Group. Private Banking may be carried out internationally by different HSBC legal entities according to local regulatory requirements. Different companies within HSBC Private Banking or the HSBC Group may provide the services listed in this document. Some services are not available in certain locations. Members of the HSBC Group may trade in products mentioned in this publication.
This document is provided to you for your information purposes only and should not be relied upon as investment advice. The information contained within this document is intended for general circulation to HSBC Private Banking clients and it has not been prepared in light of your personal circumstances (including your specific investment objectives, financial situation or particular needs) and does not constitute a personal recommendation, nor should it be relied upon as a substitute for the exercise of independent judgement. This document does not constitute and should not be construed as legal, tax or investment advice or a solicitation and/or recommendation of any kind from the Bank to you, nor as an offer or invitation from the Bank to you to subscribe to, purchase, redeem or sell any financial instruments, or to enter into any transaction with respect to such instruments. The content of this document may not be suitable for your financial situation, investment experience and investment objectives, and the Bank does not make any representation with respect to the suitability or appropriateness to you of any financial instrument or investment strategy presented in this document.
If you have concerns about any investment or are uncertain about the suitability of an investment decision, you should contact your Relationship Manager or seek such financial, legal or tax advice from your professional advisers as appropriate.
Market data in this document is sourced from Bloomberg unless otherwise stated. While this information has been prepared in good faith including information from sources believed to be reliable, no representation or warranty, expressed or implied, is or will be made by HSBC Private Banking or any part of the HSBC Group or by any of their respective officers, employees or agents as to or in relation to the accuracy or completeness of this document.
It is important to note that the capital value of, and income from, any investment may go down as well as up and you may not get back the original amount invested. Past performance is not a guide to future performance. Forward-looking statements, views and opinions expressed and estimates given constitute HSBC Private Banking’s best judgement at the time of publication, are solely expressed as general commentary and do not constitute investment advice or a guarantee of returns and do not necessarily reflect the views and opinions of other market participants and are subject to change without notice. Actual results may differ materially from the forecasts/estimates. When an investment is denominated in a currency other than your local or reporting currency, changes in exchange rates may have an adverse effect on the value of that investment. There is no guarantee of positive trading performance.
Foreign securities carry particular risks, such as exposure to currency fluctuations, less developed or less efficient trading markets, political instability, a lack of company information, differing auditing and legal standards, volatility and, potentially, less liquidity.
Investment in emerging markets may involve certain additional risks, which may not be typically associated with investing in more established economies and/or securities markets. Such risks include (a) the risk of nationalization or expropriation of assets; (b) economic and political uncertainty; (c) less liquidity in so far of securities markets; (d) fluctuations in currency exchange rate; (e) higher rates of inflation; (f) less oversight by a regulator of local securities market; (g) longer settlement periods in so far as securities transactions and (h) less stringent laws in so far the duties of company officers and protection of Investors.
You should contact your Relationship Manager if you wish to enter into a transaction for an investment product. You should not make any investment decision based solely on the content of any document.
Some HSBC Offices listed may act only as representatives of HSBC Private Banking, and are therefore not permitted to sell products and services, or offer advice to customers. They serve as points of contact only. Further details are available on request.
In the United Kingdom, this document has been approved for distribution by HSBC UK Bank plc whose Private Banking office is located at 8 Cork Street, London W1S 3LJ and whose registered office is at 1 Centenary Square, Birmingham, B1 1HQ. HSBC UK Bank plc is registered in England under number 09928412. Clients should be aware that the rules and regulations made under the Financial Services and Markets Act 2000 for the protection of investors, including the protection of the Financial Services Compensation Scheme, do not apply to investment business undertaken with the non-UK offices of the HSBC Group. This publication is a Financial Promotion for the purposes of Section 21 of the Financial Services & Markets Act 2000 and has been approved for distribution in the United Kingdom in accordance with the Financial Promotion Rules by HSBC UK Bank plc, which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
In Guernsey, this material is distributed by HSBC Private Banking (C.I.) a division of HSBC Bank plc, Guernsey Branch which is licensed by the Guernsey Financial Services Commission for Banking, Insurance Intermediary and Investment Business. In Jersey, this material is issued by HSBC Private Banking (Jersey) which is a division of HSBC Bank plc, Jersey Branch: HSBC House, Esplanade, St. Helier, Jersey, JE1 1HS. HSBC Bank plc, Jersey Branch is regulated by the Jersey Financial Services Commission for Banking, General Insurance Mediation, Fund Services and Investment Business. HSBC Bank plc is registered in England and Wales, number 14259. Registered office 8 Canada Square, London, E14 5HQ. HSBC Bank plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
In France, this material is distributed by HSBC Europe Continental. HSBC Private Banking is the private banking department of the HSBC Group in France. HSBC Europe Continental is subject to approval and control by the Autorité de Contrôle Prudentiel et de Résolution [Prudential Control and Resolution Authority] as a credit entity. HSBC Private Banking department of HSBC Continental Europe, Public Limited Company with share capital of 491,155,980.00 €- SIREN 775 670 284 Trade and Companies Register of Paris Bank and Insurance Intermediary registered with the Organisme pour le Registre des Intermédiaires en Assurances [Organisation for the Register of Insurance Intermediaries] under no. 07 005 894 (www.orias.fr) - Intra-community VAT number: FR 707 756 702 84. HSBC Private Banking - HSBC Europe Continental – Registered office: 38, avenue Kléber 75116 Paris- FRANCE- Tel. +33 (0) 1 49 52 20 00.
In Switzerland, this material is distributed by HSBC Private Bank (Suisse) SA, a bank regulated by the Swiss Financial Market Supervisory Authority FINMA, whose office is located at Quai des Bergues 9-17, 1201 Genève, Switzerland. This document does not constitute independent financial research, and has not been prepared in accordance with the Swiss Bankers Association’s “Directive on the Independence of Financial Research”, or any other relevant body of law.
In Abu Dhabi Global Markets (ADGM) by HSBC Bank Middle East Limited, ADGM Branch, 3526, Al Maqam Tower, ADGM, Abu Dhabi, is regulated by the ADGM Financial Services Regulatory Authority (FSRA). Content in this material is directed at Professional Clients only as defined by the FSRA and should not be acted upon by any other person.
In Dubai International Financial Center (DIFC) by HSBC Private Bank (Suisse) S.A., DIFC Branch, P.O. Box 506553 Dubai, United Arab Emirates, which is regulated by the Dubai Financial Services Authority (DFSA) and is permitted to only deal with Professional Clients as defined by the DFSA.
In South Africa, this material is distributed by HSBC Private Bank (Suisse) SA’s Representative Office approved by the South African Reserve Board (SARB) under registration no. 00252 and authorized as a financial services provider (FSP) for the provision of Advice and Intermediary Services by the Financial Sector Conduct Authority of South Africa (FSCA) under registration no. 49434. The Representative Office has its registered address at 2 Exchange Square, 85 Maude Street, Sandown, Sandton.
In Bahrain and Qatar, this material is distributed by the respective branches of HSBC Bank Middle East Limited, which is locally regulated by the respective local country Central Banks and lead regulated by the Dubai Financial Services Authority.
In Lebanon, this material is handed out by HSBC Financial Services (Lebanon) S.A.L. (“HFLB”), licensed by the Capital Markets Authority as a financial intermediation company Sub N°12/8/18 to carry out Advising and Arranging activities, having its registered address at Centre Ville 1341 Building, 4th floor, Patriarche Howayek Street, Beirut, Lebanon, P.O.Box Riad El Solh 9597.
In Hong Kong and Singapore, THE CONTENTS OF THIS DOCUMENT HAVE NOT BEEN REVIEWED OR ENDORSED BY ANY REGULATORY AUTHORITY IN HONG KONG OR SINGAPORE. HSBC Private Banking is a division of Hongkong and Shanghai Banking Corporation Limited. In Hong Kong, this document has been distributed by The Hongkong and Shanghai Banking Corporation Limited in the conduct of its Hong Kong regulated business. In Singapore, the document is distributed by the Singapore Branch of The Hongkong and Shanghai Banking Corporation Limited. Both Hongkong and Shanghai Banking Corporation Limited and Singapore Branch of Hongkong and Shanghai Banking Corporation Limited are part of the HSBC Group. This document is not intended for and must not be distributed to retail investors in Hong Kong and Singapore. The recipient(s) should qualify as professional investor(s) as defined under the Securities and Futures Ordinance in Hong Kong or accredited investor(s) or institutional investor(s) or other relevant person(s) as defined under the Securities and Futures Act in Singapore. Please contact a representative of The Hong Kong and Shanghai Banking Corporation Limited or the Singapore Branch of The Hong Kong and Shanghai Banking Corporation Limited respectively in respect of any matters arising from, or in connection with this report.
Some of the products are only available to professional investors as defined under the Securities and Futures Ordinance in Hong Kong / accredited investor(s), institutional investor(s) or other relevant person(s) as defined under the Securities and Futures Act in Singapore. Please contact your Relationship Manager for more details.
The specific investment objectives, personal situation and particular needs of any specific persons were not taken into consideration in the writing of this document. To the extent we are required to conduct a suitability assessment in Hong Kong where this is permitted by cross border rules depending on your place of domicile or incorporation, we will take reasonable steps to ensure the suitability of the solicitation and/or recommendation. In all other cases, you are responsible for assessing and satisfying yourself that any investment or other dealing to be entered into is in your best interest and is suitable for you.
In all cases, we recommend that you make investment decisions only after having carefully reviewed the relevant investment product and offering documentation, HSBC’s Standard Terms and Conditions, the “Risk Disclosure Statement” detailed in the Account Opening Booklet, and all notices, risk warnings and disclaimers contained in or accompanying such documents and having understood and accepted the nature, risks of and the terms and conditions governing the relevant transaction and any associated margin requirements. In addition to any suitability assessment made in Hong Kong by HSBC (if any), you should exercise your own judgment in deciding whether or not a particular product is appropriate for you, taking into account your own circumstances (including, without limitation, the possible tax consequences, legal requirements and any foreign exchange restrictions or exchange control requirements which you may encounter under the laws of the countries of your citizenship, residence or domicile and which may be relevant to the subscription, holding or disposal of any investment) and, where appropriate, you should consider taking professional advice including as to your legal, tax or accounting position. Please note that this information is neither intended to aid in decision making for legal or other consulting questions, nor should it be the basis of any such decision. If you require further information on any product or product class or the definition of Financial Products, please contact your Relationship Manager.
In Luxembourg, this material is distributed by HSBC Private Banking (Luxembourg) SA, which is located at 16, boulevard d’Avranches, L-1160 Luxembourg and is regulated by the Commission de Surveillance du Secteur Financier (“CSSF”).
In the United States, HSBC Private Banking offers banking products and services through HSBC Bank USA, N.A. – Member FDIC and provides securities and brokerage products and services through HSBC Securities (USA) Inc., member NYSE/ FINRA/SIPC, and an affiliate of HSBC Bank USA, N.A.
Investment products are: Not a deposit or other obligation of the bank or any affiliates; Not FDIC insured or insured by any federal government agency of the United States; Not guaranteed by the bank or any of its affiliates; and are subject to investment risk, including possible loss of principal invested.
If you are receiving this document in Australia, the products and services are provided by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL 301737) for “wholesale” customers (as defined in the Corporations Act 2001). Any information provided is general in nature only and does not take into account your personal needs and objectives nor whether any investment is appropriate. The Hongkong and Shanghai Banking Corporation Limited is not a registered tax agent. It does not purport to, nor does it, give or provide any taxation advice or services whatsoever. You should not rely on the information provided in the documents for ascertaining your tax liabilities, obligations or entitlements and should consult with a registered tax agent to determine your personal tax obligations.
Where your location of residence differs from that of the HSBC entity where your account is held, please refer to the disclaimer at https://www.privatebanking.hsbc.com/disclaimer/cross-border-disclosure for disclosure of cross-border considerations regarding your location of residence.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of HSBC UK Bank plc.
A complete list of private banking entities is available on our website, https://www.privatebanking.hsbc.com.
©Copyright HSBC 2023
ALL RIGHTS RESERVED