BR Q1 2022

09

THOUGHT LEADERSHIP

T

       he UK economy's prosperity after WWII, with well-paid jobs, substantial pensions, entrepreneurial prospects, and property ownership for many, has resulted in the wealthiest older generation in history. The over 50s own more than 70% of household wealth. This wealth has grown steadily over the last 25 years, despite economic downturns, with household net worth rising from £2.8 trillion in 1995 to £11.2 trillion in 2020, a four-fold rise.

Unsurprisingly, housing growth has far outpaced inflation and earnings growth over the same period, whilst at the same time pushing further out of reach home ownership for younger generations. The average age of first-time buyers has increased from 26 in 1997 to 33 today, spawning the so-called “Generation Rent”. In turn, increasing rents further limit the ability of younger households to save, making it even more difficult for them to climb onto the housing ladder.

When you couple this with a challenging economic and political landscape, with the financial repercussions of COVID to be felt for decades, global political instability, and the threat of East vs West lingering, financial achievement for many of the younger generation lays with the prospect of a greater inheritance. It is predicted that over the next 30 years £5.5 trillion will pass between generations.

This is the “Inheritance Economy”.

In essence it is an extension of the “Bank of Mum and Dad” which has become the largest ‘lender’ in the UK, particularly to first-time home buyers. Gifting from the older generation during their lifetime is a large part of intergenerational wealth transfers, providing a helping hand to younger family members while also being a cornerstone of estate tax planning - gifts fall outside of a deceased estate for the purposes of calculating IHT if made at least 7 years prior to death.

So, what are the challenges for financial advisers?

An ageing population, which holds the majority of the UK’s wealth, is set to lead to a rising number of deaths in the coming years. The associated pay-out and reduction of funds under management through large IHT liabilities, and the beneficiaries' requirement for cash, plainly has the potential to dramatically reduce an adviser's funds under management, as well as their client base numbers.

However, increasing availability of professional estate planning advice, incorporating the whole family and beneficiaries to enable closer alignment of goals across generations, with a larger probability of generational client retention, offer opportunities to address this.

In addition, seeking to reduce IHT liabilities will help the preservation of a higher estate transfer value. This can be accomplished by using a combination of gifting and tax-efficient investment products, many of which give not just lifetime income but also liquidity and access if needed, as well as the advantage of IHT relief.

The Inheritance Economy is here to stay, and we must all adapt if the financial services industry is to continue managing wealth through the generations.

The Rise of the Inheritance Economy

DARYL THORPE

PARTNER ZENZIC CAPITAL

One way to take advantage of the potential created by the emergence of the inheritance economy is to have a stronger interaction with beneficiaries prior to them receiving their inheritance.

Daryl Thorpe, Partner, Zenzic Capital

The increase in wealth in the UK has been remarkable in recent decades, with total household net worth increasing by a factor of four from £2.8 trillion in 1995 to £11.2 trillion in 2020.

www.zenziccapital.com 020 3818 9235zeps@zenziccapital.com

Daryl Thorpe, Partner,Zenzic Capital

Photography byInterview by

08

Russia-Ukraine: BR on AIM in times of crisis

At the time of writing, in early April, Moscow’s bullying tactics in Ukraine have turned into a full-scale assault causing fresh volatility across the financial markets.

Still, the FTSE 100 index is down less than other European
bourses, partly because the UK market has a large weighting towards the energy sector and oil giants BP and Shell stand to benefit from the surge in oil prices through $100 a barrel.

In addition, as noted by the London Stock Exchange (LSE), “the resilience of our infrastructure has provided certainty; markets have been able to function efficiently throughout the crisis.”

FTSE AIM All-Share index, which closed at 1,031.91 on 23 February, the eve of Russia’s invasion of Ukraine, dropped to 963.57, its lowest post-invasion close to date (a 6.62% decline), on 8 March.

The market has now regained all the lost ground to close above its pre-invasion close, at 1,055.26 on 4 April, or 2.26% higher.

In February, the Treasury’s inheritance tax revenues increased by £700m since last April – making it a record high.

Jessica Franks, Head of Retail Investment Products, Octopus Investments

FTSE AIM ALL-SHARE INDEX

1.300.00

1.200.00

1.100.00

1.056.81

1.000.00

1 day

900.00

May 21

Jun 21

Jul 21

Aug 21

Sep 21

Oct 21

Nov 21

Dec 21

Jan 22

Feb 22

Mar 22

Apr 22

Source: LSE

AIM for protection from inheritance tax

Déjà vu all over again

The Alternative Investment Market (AIM) was launched on June 19, 1995 as a sub-exchange market of the London Stock Exchange. The junior market was designed to help small, high-growth companies that are keen on raising capital for expansion.
Although many people view AIM stocks as a high-risk investment, the tax benefits that come with AIM investments make them very appealing to a lot of investors.

AIM offers investors various ways of taking advantage of government-sponsored tax relief and other forms of loss relief on shares invested in through Venture Capital Trusts (VCT) or that qualify for the Enterprise Investment Scheme (EIS).

These highly targeted venture capital schemes provide relief from paying income tax and capital gains tax on direct investment in early-stage companies.

Business Relief (BR) operates in a different way, by giving exemption from UK inheritance tax to equity in qualifying business assets held at the owner’s death. Qualifying assets can include investments in unlisted companies and in companies on the AIM market.

In times of heightened market risk and volatility, understanding history can help to maintain perspective. From the past, we know that equity market sell-offs spurred by geopolitical events have typically been short-lived.

Over the following 12-month period, returns are largely in line with long-term average returns. So far, market reaction to the invasion in Ukraine is fairly consistent with historical precedent.
Indeed, experienced investors in AIM for IHT planning purposes must be having that eerie feeling of déjà vu as they watch the junior market’s performance these days.

Everything seems like history repeating itself. For example, at the first Covid-19 lockdown when stocks dropped like dumbbells from a 10-story window, with the AIM market falling 36% in a month. Soon after, the stocks recovered, posting a strong 20% gain, and eclipsing the main UK stock market which remained lower.

The AIM market pulled a similar trick after the financial crisis, more than doubling its valuations from the lows.

What’s the lesson? Don’t panic because stocks will bounce back. Instead, keep an eye out for bargains. It’s worth remembering that the falls we’re now seeing in stocks are mainly due to fear and uncertainty rather than any fundamental impact on earnings from the crisis.

Hunting for bargains

While the Ukraine crisis undoubtedly presents challenges to many, if not all, AIM companies, it also provides opportunities.

One of the defining characteristics of AIM since its inception is its flexibility and the support provided to fast-paced, innovative businesses. AIM has attracted highly innovative businesses with long-term growth trajectories, from healthcare and pharmaceuticals, to tech and telecoms, and many of these businesses have the agility to adapt swiftly to changing operating conditions.

The current burst of interest in AIM funds suggests that investors, eager to back burgeoning businesses through economic vicissitudes, remain willing to explore the market’s potential.

With the chaos in markets instigated by Russia’s invasion of Ukraine, investors are still hunting for bargains in the technology sector. Over the last few weeks, only the likes of the defence and mining sectors have managed to keep their heads above water on the stock market.

Commodities are expected to be more expensive amid the rising tensions. "The experience of the 1970s suggests that the ongoing war in Ukraine and its effects on commodity prices will reshape commodity markets for years to come," Capital Economics commodities economist Kieran Clancy said in a new report.

Clancy argues that elevated prices are likely to lead to some degree of ‘demand destruction’ (i.e., a sustained or permanent decline in demand). Further ahead, he sees a renewed focus on energy independence in Europe and elsewhere, which will have longer-lived consequences for commodity demand and supply.

The European Commission has already announced plans to make Europe independent from Russian fossil fuels before 2030, which is likely to accelerate the shift towards renewable energy in the years ahead.

A ROAD MAP

Investing for the long termThis requires us to be alert to the many risks we shall see along the way, while maintaining a constant vision of our long-term goals, whatever events are placed in our paths.

COMPANIES ON AIM BY SECTOR

Diversification is the watchword for
these times
Successful, long-term investors survive short-term falls by sticking to investment principles that have withstood the tests of time. For investment portfolios more broadly, this will include better diversification of your investment holdings.

Diversification remains the best way to help usher our portfolios towards the time we shall be needing them to fund our life events.

UtilitiesBasic MaterialsConsumer GoodsConsumer ServicesFinancialsHealthcareIndustrialsOil & GasTechnoogyTelecomms

Looking for bargain opportunitiesThe current crisis, and the market’s knee-jerk reaction to the erratic events, is creating windows of buying opportunities.

Source: Aimlisting

The AIM market offers tremendous opportunities for diversification. Companies on AIM, from more than 90 countries, are spread across 40 different sectors and 90 sub-sectors.

The escalating conflict in Ukraine will continue to have ripple effects across the economy, adding to the stock market’s woes and spooking investors. However, the underlying sentiment regarding the fundamentals of the market and the economy remain optimistic. And BR will continue to help investors pass on more of their wealth, while targeting growth.

In times of heightened market risk and volatility, understanding history can help to maintain perspective.

07

W

Mental capacity issues and investments under discretionary management: a change in guidance from the Office of the Public Guardian

              here an investment manager is engaged to manage a client’s investments on a discretionary basis, it is important to consider the arrangements in place in the event that the client loses mental capacity.

This is especially important if there are circumstances, such as the client’s age, where addressing this issue should be automatic. The loss of a client’s mental capacity is likely to trigger the termination of the investment manager's terms of engagement.

What, then, happens to the funds under discretionary management?

This article specifically considers the revised guidance issued in March of this year by the Office of the Public Guardian ("the OPG") in relation to provisions regarding the management of investments on a discretionary basis in property and financial affairs lasting powers of attorney ("LPAs").

Planning ahead for the loss of mental capacity

Whilst an individual still has sufficient levels of capacity, they are able to make an LPA which delegates certain powers to their attorney(s) to make decisions on their behalf, once the LPA is registered with the OPG.

If carefully drafted, an LPA containing the necessary provisions would enable a validly appointed attorney to engage an investment manager to manage, or to continue to manage, investments on a discretionary basis.

The position previously

In 2015, the OPG issued guidance ("the 2015 Guidance"), making it a requirement that an LPA contain an express instruction enabling an attorney to appoint a third-party specialist to manage investments on a discretionary basis or, where there was a scheme already in place, for the management of that scheme to continue.

The 2015 Guidance was based on law of agency: an agent (the attorney in this case) cannot delegate their authority and must carry out their duties personally. The 2015 Guidance also reflected the position that many financial institutions were taking where they were requiring express authority in an LPA to allow the attorney to engage them in the management of a fund on a discretionary basis.

However, in practice, many LPAs have not contained this express instruction and this has left attorneys in a difficult position.

The attorney would have a duty to manage the investments but, in all likelihood, the majority of attorneys would not have the necessary expertise to be able to manage the investments in the same way as a third-party specialist.

In order to rectify the position to allow an attorney to delegate investment management powers to a third party, it was necessary for an application to be made to the Court of Protection ("the Court") in order for the Court to give express authority to the attorney to delegate powers in this way.
Such an application is timely and costly: it can take around 10 months to make and an attorney is likely to require legal advice in relation to making it. Ultimately, the result of the failure to include an express instruction in an LPA is that it could put investments at risk.

The position now: OPG revised guidance

In March of this year, the OPG revised its guidance so that including an express instruction in the LPA in relation to delegating powers to investment managers to manage investments on a discretionary basis is no longer necessary.

Given how often such an express instruction was omitted, the revised guidance has been welcomed in many quarters.
However, the OPG’s guidance has been cautiously worded with the recommendation that where a donor would like their attorney to have the power to delegate investment decisions to a third-party specialist, the donor should consider obtaining legal advice on whether it is necessary to include an express instruction in relation to this in the LPA.

The OPG’s guidance states “this is because at least one major financial institution has taken the position that existing contracts relating to discretionary investment management schemes will come to an end on the loss of capacity of the donor of an LPA, and that any new investments by attorneys in discretionary investment management schemes will only be permitted if there is an express instruction on the matter in the LPA”.

Conclusion

Although the OPG's guidance is clear, a prudent donor should still obtain legal advice in relation to drafting their LPA. From a legal perspective, lawyers should also continue to include express instruction in an LPA which should ensure greater certainty.

For investment managers, it is prudent to clarify their company's position on any required wording or instruction in an LPA in order to address this with their clients. This will ensure that all the necessary steps are taken to allow the continuation of the management of the fund on a discretionary basis if the client loses capacity.

MOLLY HUNTER

ASSOCIATE, MISHCON DE REYA

The loss of a client’s mental capacity is likely to trigger the termination of the investment manager's terms of engagement.

Although the OPG's guidance is clear, a prudent donor should still obtain legal advice in relation to drafting their LPA. From a legal perspective, lawyers should also continue to include express instruction in an LPA which should ensure greater certainty.