Post Pandemic Challenges for the Wealthy
Wealth taxes have become a popular subject lately, as the world faces up to repairing public finances in the wake of the pandemic.
In the lead up to the UK's recent budget, many speculated that the UK Chancellor would introduce measures to replenish depleted national coffers by placing a more significant tax burden on wealth. Chancellor Sunak was encouraged by some groups to levy a wealth tax on millionaire couples, aimed at raising £260bn over five years.
The wealth tax didn't happen, but the tax bill that some households in the UK face in future years will go up, with higher income allowance thresholds frozen for five years. Elsewhere, Argentina, locked in negotiations with the IMF on debt (having defaulted on US$65bn of overseas borrowing in 2020), has levied a wealth tax on 9,000 citizens with a net worth of more than US$2.4m
Current trends fall short of an all-out target the rich strategy. Still, history shows that governments have always looked to wealthy individuals' assets and reserves in the aftermath of economic downturns. The prospect of increased wealth taxation in due course is certainly not out of the question, whether that's income tax, inheritance tax, property tax or targeting private capital with new wealth taxes.
We only need to look across the Atlantic, where newly-installed President Biden has set out several proposals that target the wealthy, including changes to income, capital gains and carried interest, as part of a US$1.9 trillion recovery package.
All of this places wealthy individuals and families firmly into the public debate about how governments will repay the pandemic recovery costs. We know already that the top 1% of the rich in the United States pay 38% of total federal income taxes – proportionally far more than other segments. And in the UK, the Treasury calculate the top 5% of earners generate half of all income tax.
How should the wealthy respond?
Rather than push back on this, many wealthy global citizens directly support recovery efforts, demonstrating they are acutely aware of their responsibilities, in a world of intense competition for private capital resources.
Juxtapose this with a family office sector already well-travelled on the road to self-awareness, exhibiting institutional investment hallmarks, and pursuing impact, sustainable and ESG strategies with increased vigour.
And in terms of an investment-led recovery, there is considerable demand for private capital, with a US$15 trillion global shortfall in infrastructure investment. Families holding significant dry powder, are ready to deploy into impactful infrastructure, private equity and venture deals, all of which invariably create jobs and increase tax revenues.
There is also strong evidence that families have been pursuing philanthropic and ESG strategies. And they are reframing their succession and legacy planning with the next-generation set to assume custody of some US$30 trillion over the next ten years.
That's not to say that the demand for private capital from the state and the private sector are incompatible – but this reframed relationship between the wealthy and the state does create a far more complex picture. To what extent should the rich rewrite their rulebooks to support the endeavours of national government? Should they reassess their values and objectives? What are the reputational and financial consequences of their actions?
As governments begin to implement and fine-tune their pandemic recovery strategies, we can expect that the wealthy individual and family role will become even more nuanced as public-private partnerships develop.
New paradigm-thinking for IFCs?
For IFCs that have long played an essential role in advising the wealthy and supporting them with their strategies, this new paradigm should resonate clearly and inform future thinking.
Multi-disciplinary firms like Mourant, located in leading IFCs such as Jersey, Guernsey, the BVI Hong Kong and the Cayman Islands have shown natural agility over the past decade, expertly addressing the needs and requirements of families and wealthy individuals in conditions that have become more complex, more specialised, more institutional.
If IFCs are to navigate these cross-currents successfully, they must deliver holistic, multidisciplinary support beyond traditional trust and tax planning, extending services into consultancy, compliance, governance, regulation, investment, digital, and reputation management.
With so many competing demands for private capital, and reputation needs paramount, IFC firms must ensure clients are on a sound footing. Clients will need assurance that they are doing the 'right thing' – from location decisions on domiciling structures to managing tax compliance, investment disclosures, and support for national and international economic and social recovery programmes.
More than ever, the pandemic has highlighted the importance of advisers in IFCs adopting a participative framework amongst their private client and family office clientele to engender a better understanding within families, based around their core values, business and philanthropic objectives.
The post-pandemic era will bring a challenging new paradigm to the wealthy, testing their positioning in an environment where their societal contribution will be under scrutiny.
There is an opportunity for professional services firms in IFCs to embed their trusted adviser role, helping clients navigate complexity in a fast-moving environment where the only certainty is change.
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