Putting family first

11 May 2015

Written by Dominic Wheatley

Guernsey Finance’s Dominic Wheatley suggests that family businesses should consider the benefits offered by international finance centres.

'But, Dom', said my young friend, 'democracy is the political version of the market and you are a market economist.' She was speaking in response to my none-to-expert analysis of the sub-optimal outcome of many, supposedly democratic, processes.

Like the market, democracy works best where its outcome is as unconstrained as possible by rules and processes, and where voters act rationally and vote in line with their own preferences.

My friend was right; I am a market economist. However just as flawed political systems give rise to majority governments who attract only a third of the votes, flawed markets will also deliver uncertain outcomes.

Such uncertainty becomes only greater when put into an international context, where the complexity of interaction between varying national and supranational pressures combine, delivering an environment where mere economic survival requires constant vigilance and speed of response.

The plight of family business

Families are hit twice by this. With 90 per cent of the world's businesses family controlled, they must look to maintain their success. However they also live increasingly nomadic lives with new generations often choosing educational, professional and lifestyle options across the world.

This places an increasing strain on the arrangements surrounding family assets that now need to meet an increasingly complex set of inter-related tax rules, in an increasingly volatile financial environment.

Small wonder that 'safety first' has become the watchword both in terms of governance structures and legal frameworks. Small wonder also that the location of family wealth is becoming increasingly divorced from the location of family members, or of the physical and business assets themselves; the choice of that location is so critical to the financial planning of the family.

The criteria for selecting a financial jurisdiction in which to place your assets, as well as your business and wealth, can be simple to identify but not necessarily easily found, especially in combination. Geopolitical stability is not a function of history but a function of jurisdictional strategy and policy building on that history. Historical political stability needs to be augmented by sound public finances and high the levels of international cooperation necessary to ensure international support.

Ideal characteristics

Legal practice needs to be robust, not only locally but also internationally, supported by the reliable international precedent and respect that ensure predictable outcomes.

The tax environment needs to be neutral but, more importantly, capable of interacting predictably with the tax environments where families live and companies operate. Avoiding tax in those places is not the game; it is about avoiding the duplication of tax burdens that are a risk of international life, both corporate and personal.

Finally governance and asset management need to be expert, responsive and accountable. A quality fiduciary industry of long standing, backed up by internationally respected standards of regulation, are essential for the continuing preservation of wealth and the reliable performance of assets.

It is no wonder then that Guernsey, as one of the world's most developed and successful independent wealth management centres, has designed itself around these criteria.

The jurisdiction's geopolitical stability is founded upon our 1000 years of political stability within the British Isles, and a strong relationship with the UK. This is backed up by full engagement with modern international authorities and cooperation with their initiatives, as well as being the most compliant jurisdiction in the world, in relation to FATF's anti-money laundering and counter-terrorism recommendations.

Guernsey' legal system is based on English law and makes use of the rich supply of precedents available, with respect to financial and corporate litigation. The tax environment is deliberately neutral and is based on a zero rate applied to international financial structures. This leaves the taxation of all income and assets in the hands of the legitimate tax authorities, where the owners and assets are located.

The wealth management industry is one of the oldest independent industries in the world, with over 50 years of experience. It includes local independent and international practitioners, bankers, lawyers and accountants with a vast breadth of knowledge and experience.

Guernsey was the first jurisdiction in the world to regulate service providers in the fiduciary industry, while the regulatory standards have been commended by the IMF and have been replicated widely.

All of this is the result of a determination to remain at the forefront of international wealth management, backed up by the flexibility and ability to respond quickly to a fast developing and volatile world.

An original version of this article was published in Private Client Adviser, May 2015.

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