(TAX) Planning for HNWIs

Costas Markides, Board Member, KPMG in Cyprus talks about advising High-Net-Worth-Individuals

The first time someone hears the phrase ‘tax planning’, the subliminal and instant message that is perceived and understood by the human brain is none other than the purposeful minimisation of taxes. This connection is unavoidable and, in all fairness, a trademark of the vast majority of the tax planning techniques and strategies devised until a few years ago.

Tax professionals, myself included, craved to start a conversation on tax planning, be trying to and explain the difference, in a technical and mostly incomprehensive way, between the meaning of tax avoidance — which is the minimisation of taxes as a result of efficient and lawful tax planning techniques — and its universally hated and down to its core illegal, concept of tax evasion. In a post-BEPS (Base Erosion and Profit Shifting) world however, the very distinct line separating the concept of tax avoidance and tax evasion has been deliberately blurred to a point where,the ex-foes ended up being two sides of the same coin.

The concept of tax avoidance has been obscured by the fact that what is legal, does not necessarily make it moral and as a result, the concept of tax morality was abruptly introduced as a term in the glossary of international tax. The competition for tax morality, combined with the global and unquestionable support for investments in ‘ethical’ corporate multinationals that have adopted Environmental, Social and Governance practices (ESG) has become the new normal.

It is no exaggeration to say that the world of international tax and consequently, of conventional tax planning, has been turned upside down over the last few years. When it comes to tax planning for High-Net-Worth-Individuals (HNWIs) however, very little if anything, has changed. This is because, conventional tax planning strategies and advice on minimising taxes has never been a top priority for HNWIs.

Dealing with HNWIs encompasses much more than advice on minimising taxes

Family office advisors and tax professionals will surely agree that when it comes to dealing with HNWIs, tax planning with a focus on minimising taxes has never been a zero - sum game. Minimising taxes does not even feature in the top-three reasons for which HNWIs retain expert advice from a tax professional. Non-tax related reasons will, in my experience, always lead and dominate the discussion, underlining the great importance assigned to them by HNWIs. The most common reasons of concern in random order, since personal circumstances and the state of affairs of the family at the time will determine the weight assigned to each, comprise the following: personal and family safety, preservation of the current level of wealth, turbulence-free succession planning and securing the well-being and unity of the family.

Non-tax related factors can, and often will decide the location of relocating the business and personal affairs of a HNWI and his/her family, which often may be in opposite directions with the tax efficiency of the optimal location. Consider a scenario for example, where the school of preference for the young children of an HNWI, is located in a country with very high rates of personal taxation and harsh taxation rules for tax resident expatriates. The desire for higher quality education for the children, combined with the need for securing the unity of the family, will always rank higher for an HNWI, than any tax savings left behind. Another example in recent years, is the prolonged duration of the pandemic and its long-lasting effects on all aspects of everyday life, which has magnified the importance placed by HNWIs on the issue of physical safety and the emotional health of their family. The well-being and safety of the family will always top any monetary gains, with no exceptions. Another example is the need of the HNWI to preserve the current level of wealth accumulated and to be able to pass it on to their family and future generations in a fair and, as much as possible, risk-free manner. What is of essence for HNWIs, is to feel comfortable that the family and heirs are protected and taken care of in the event of something unexpected happening.

No known recipe for optimal (TAX) advice

Tax planning for HNWIs defies most conventional practices and norms for minimising taxes. In fact, it is entirely at a whole new level on its own, where the non-tax related factors have a much more important and decisive role than their tax related counterparts. The dilemma of whether to pursue more money, versus the well-being of the family has an easy answer. HNWIs know better than most that money can be an important factor in the well-being of the family, however, more significant are the value and efforts for ensuring the well-being of the family, which remain priceless.

Efficient advice to HNWIs requires above all, active listening and a deep understanding of their, always, unique personal and family circumstances and trying to find solutions that, as much as possible, find a middle ground between their prioritised needs and their monetary affairs.

Offering one-sided solutions, which satisfy the HNWI’s all or most of the non-tax related considerations but are disastrous for the monetary affairs of the family or the opposite scenario, where the provided advice fully serves the family’s monetary affairs without catering for the needs of the family — which most of the times are non-negotiable — will not keep an advisor on the job for long.

E-mail: cmarkides@kpmg.com