From London, with love

London's family office sector has seen rapid expansion in recent years. The continuing build-up has produced what is referred to in Silicon Valley as the 'cluster effect'. In other words, the momentum of family offices setting up in London is such that it attracts others to the UK capital too, simply on the basis that they want to be close to their own kind.

This also means that they're just a short walk away from sharing ideas, interacting and on occasion, doing deals with similar private closely-held organisations similar to their own.

For those who are outside the wealth community but who are 'in the know', the family office sector keeps an intentionally low profile, yet contributes vastly to the UK economy and industry. However, with changes to the UK environment taking hold, the question must be asked, is London jeopardising its world-leading status?

Key considerations when setting up a family office

Generally, family offices exist principally to preserve and grow family wealth through the generations. They are the primary custodians of family principal and unleveraged capital. They 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 an '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 international currency risks make London an increasingly attractive jurisdiction to establish a base.

More recent global developments include the need to balance sufficient transparency (while retaining the legitimate right to privacy) cyber security issues and reputation management, which go hand in hand with good family and family office governance.

Beyond these general factors, the key consideration for establishing any family office 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 family offices unique.

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 family office counterparties, including financial intermediaries;

• A highly regarded financial regulatory regime;

• Stable local currency and government;

• Access to private banks and banking relationships; and

• An ability to recruit and retain high quality 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 family offices setting up in London is testament to its prime attractiveness among competitor location jurisdictions, for example, Switzerland and Singapore. This is evidenced by the increase in the number of South American families deciding to base their offices in London (in place of the traditional bases within the US, notably Miami).

The value to London

The majority of family offices 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 offices are not contributing to the 'lights-off' trend in London's high-end residential property sector. On the contrary, they 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 family office is very broad and ranges from instructing professional services firms (for example, law firms) in relation to asset acquisitions/disposals (sometimes to other family offices), to dealing with the Mayfair residential household employment agreements and country estate gardening/staffing issues. For confidentiality and other operational reasons, offices are sometimes split between the business office on one floor, and the private/personal office on another floor.

Fees generated and paid by family offices, while difficult to track because of their privacy, are very real and are visible to professionals that interact with and service their clients across their myriad needs and transactions. Family offices rely on professional services firms, banks and often self-styled 'private offices'.

Trouble on the horizon

We in the UK are often unaware of the individuals and families behind these offices. They typically relish discretion and become resident in the UK without much fanfare. However, we could risk them leaving just as quietly. If there is an exodus of such individuals, the impact on the UK would not go unnoticed.

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 using 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 altogether. From April 2017, certain long-term UK residents who are domiciled outside the UK will be deemed UK domiciled 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 family office based in London.

Simultaneously announced were further reductions of the UK corporate tax rate from the current 20 per cent to 18 per cent (until 2020), making UK company tax rates among the lowest in the OECD. This will increase the attractiveness of establishing a base in London, given that many family offices are structured as UK resident companies.

Conclusion

The blossoming of the London family office sector is likely to continue, particularly given the continuing rule changes being proposed at both OECD and national governmental levels, regarding issues ranging from transparency to taxation.

Together with the increasing geopolitical, currency and debt risks (both private and sovereign) in many regions around the world, alongside the focus on the levels and concentration of private wealth in such regions, the attractiveness of London as a 'safe haven' for international private wealth will only increase. 

Ashley King-Christopher is a partner and head of the family office group
at Charles Russel Speechlys

---