Accumulating family wealth

There is a form of land tenurethat has tended to be associated with impoverishment, and it has a rather wonderful name: gavelkind. When gavelkind tenure prevails, and where people die intestate (or where the principles of gavelkind are adhered to in the will), then instead of inherited property transferring to the surviving spouse, or to the eldest heir (primogeniture), the inheritance is split evenly between all the heirs.

After a few generations of this, the inevitable consequence in an agrarian society, is that the land becomes distributed in a large number of small holdings, none of which are economically viable, or even useful, and capable of maintaining a high standard of living for the owners. Furthermore, once distributed between an array of disparate landowners actual ownership can become obscured, and the process of reconsolidating small holdings into viable farms, tricky.

Malta also has gavelkind inheritance law as any person who has attempted to purchase a Maltese farmhouse will affirm. When purchasing a vintage property it is a matter of great frustration to have to track down its ownership back to the nth generation to establish who currently owns some miniscule fraction of the building. So inheritance law clearly has an important impact on the long-term viability on a nation’s economy.

At an event last year the Minister Chris Cardona explained that “Family businesses are precious and important, and deserve the support of government. We want to create a framework through which members of family businesses can receive legal guidance and assistance so that they may plan adequately and be able to affect a successful transfer of their business when the time comes. ”

At the time the minister was speaking in the context of having just set up a committee to discuss the creation of the Family Business Act, which would be the first such act in Europe: “We are aware that no such law has been enacted in other EU member states and that this legislation will be a pioneer, allowing businesses to considerably increase their chance of survival and to prosper in what is an ever-increasing competitive market.”

The logic underpinning the government’s steps in this direction reflect the large number of family businesses in Malta, where Dr Cardona has stated that 75% of SMEs in Malta are family businesses.In other terms, he has observed that there are 31,000 small family businesses in Malta, which in turn employ around 40,000 people (with some firms employing as many as 500 people). The problem, as it is perceived, is that, to quote The Malta Independent, “A substantial majority [of firms] pass on to the second generation but only 30 per cent of these are successful in the transition, and less than 10 per cent make it a success in the third generation.”

More specifically theproblems in transferring ownership between generations include that with the intergenerational change in management there is a change in leadership, to a new team that may lack suitable skills. Furthermore there is the small matter of paying the stamp duty due on the transfer of ownership, which can impose a financial burden on the acquirers at the time of transfer.

While these points are valid, it is surprising that this is an argument being heralded by a party of the left, who one would have thought might have been more concerned about equity and wealth distribution, than continuity of ownership. For all its apparent faults, what gavelkind had going for it was that it very rapidly redistributed accumulated wealth. Indeed some on the left still feel that any form of inherited wealth is contrary to the common weal, and that inheritance taxes should be actively used to reset the nation’s resources periodically (or to “shake up cornflake packet” to borrow Boris Johnson’s evocative phrase). Indeed the left-wing intellectual du jour, Thomas Piketty, has argued (not without challenge, it should be noted) that wealth inevitably accumulates in the hands of a few, unless actively redistributed.

Furthermore, if 31,000 small firms employ 40,000 people, there must be a lot of “family” firms with only one employee. These seem more like “sole traders with families” than “family businesses” in any meaningful sense. There is also room to examine the assertion that “less than 10% make it a success in the third generation”. If (and the following figures are unscientific) a generation represents 25 years, then three generations represents 75 years, and how many businesses experience uninterrupted success for 75 years whether-or-not family firms?

So there seems to be a left-wing government planning to implement a law that is specifically designed to conserve, and possibly event consolidate, wealth across generations. Where has the impetus for this law come from? Probably the law is nothing more than a well-intentioned measure to help local family firms.

However, perhaps another possible solution to this enigma is found on one website that already speaks of the new “Family Business Act” as being of interest to international family businesses as part of their wealth management. By creating a law for “family businesses” maybe the intention is to create new products in the international tax planning market which Maltese financial services firms will then be able to market around the world? The benefit to Maltawouldthen of course accrue from the tax revenue and the fees generated from international family firms relocating to Malta. Whatever the purposes of this new law The Malta Business Weekly is not against it in principle, but this paper will be monitoring events with interest.