It was recently reported in the British press that bragging rights could be earned amongst ultra-wealthy families and their family offices by paying more tax, not less.
For the last two years The Sunday Times has published its annual ‘Tax List’, the sister countdown to the long running Rich List, singling out the rich and famous who have contributed the most to the public coffers in the last year. Its emergence indicates what we now expect from the wealthy; that they should be giving back to society rather than amassing more wealth, and more importantly, celebrating this fact. But how did we get here and what does it mean for family offices in the future, particularly as governments around the world count the financial costs of the Covid-19 pandemic?
Before attempting to answer these questions, I should indulge you, the reader, as to how the suggestion that bragging rights from paying more tax came about. The story lies in the historic rivalry between two of London's greatest property dynasties, the Cadogan family and the Duke of Westminster's Grosvenor Estate. According to the latest Tax List, the Cadogan family appeared to be paying a similar amount of tax to the Grosvenor Estate, even though the Cadogan estate is a third of the size. Upon publication the Duke was apparently outraged to appear so low down the Tax List.
The Times posed the question as to whether the perilous state of Britain's Covid-ravaged public finances now place a greater onus on wealthy individuals and their businesses to become more transparent about what taxes they pay. This may well be the nub of the issue and epitomise the position ultra-wealthy families and their family offices find themselves in.
We must go back to the financial crisis of 2008 to understand why the wealthy are under so much scrutiny. Since 2008 there has been a perceived widening of the gap between those who ‘have’ and those who ‘have not’. The subsequent fallout from the Panama Papers in 2016 and Paradise Papers in 2017 has meant that the line between legitimate tax planning and tax evasion blurred. Major corporates have been hung out to dry for not paying their fair share of tax, and by implication, the wealthy and their family offices are being measured by the same yardstick. To counter this, family offices must attempt to reposition the purpose of their wealth, to answer calls that they are not paying their fair share, attaching great weight to their ‘social capital’ than their financial capital.
But what does ‘social capital’ mean? There is no universal definition, but the Organisation for Economic Co-operation and Development describes it as “networks together with shared norms, values and understandings that facilitates co-operation within or amongst groups”. Multi family office Stonehage Fleming has identified social capital as one of four pillars of capital to be considered in the context of succession planning and creating a legacy (1), the others being financial capital, intellectual capital and cultural capital.
So why now? What we are experiencing now is the perfect storm of events which have only served as a catalyst to advance the need for family offices, placing great weight on their social capital.
The first of these events is the ‘great wealth transfer’ which describes the succession of an estimated $68 trillion (2) of wealth from current wealth holders, typically the Baby Boomer generation, to their children, typically millennials over the next 20 years. The next generation is more likely to possess a moral conscience driven by increased awareness of social inequality and the need for environmental sustainability, compared to current wealth holders. They feel less comfortable with the trappings of capitalism and want to find a purpose to the wealth which makes it more acceptable to them and the values they uphold. We are already seeing this manifest itself through the increased interest in environmental, social and governance (ESG) focussed and impact investing and this is a trend which is set to continue. This is further evidenced with the next-gen being desirous of paying their fair share of tax; indeed, it is no coincidence that the Duke of Westminster is a member of Generation Z and arguably even more attune to such issues.
The second of these events is the financial fallout from the Covid-19 pandemic with which governments across the world are presently grappling. Raising tax will, of course, go some way to meeting these costs, and may lead to full scale tax reform in many countries including the UK where the introduction of a wealth tax is being given serious consideration. The economic effects of the pandemic have been felt most greatly by those at the lower end of the wealth spectrum, often at the cost to their jobs and livelihoods, whilst those at the upper end are only less wealthy than they were before. Added to this is the perception that those who have been on the ‘front line’ during the pandemic, health and care workers, are often at the lower end of the wealth scale. This has only led to increased calls to attempt to level the playing field between rich and poor.
Increasing tax measures is one way of achieving this but others, particularly big businesses, have shown that they can do their part in other ways through their own corporate social responsibility (CSR), which has found favour with the general public. Take for example General Motors in the US, which switched parts of their factories to making ventilators and PPE, and suspended dividends to shareholders. Covid has acted as a catalyst to accelerate the shift to stakeholder capitalism, away from the sole purpose of delivering profit to their shareholders.
Family offices can draw lessons from big business through their underlying businesses demonstrating their commitment to CSR and investing in an impactful way or in companies with ESG credentials and through charitable and philanthropic causes. All of which help demonstrate the value placed on social capital, which serves the dual purpose of improving reputation and ensuring the successful transition of wealth to the next generation who are more greatly enfranchised with the concept. This all requires collective buy-in at all generations within the family to ensure a set of defined values and goals which the family and their family office can use as terms of reference when seeking to deploy and demonstrate their social capital. This also requires careful handling to ensure families can effectively demonstrate their value to society without paying a price in privacy.
1. Four Pillars of Capital for the Twenty First Century (2015)
2. The American Banking Association