BR April 2023

Investing in Business Relief during economic uncertainty

By Mohamad Dabo, Senior Editor, Intelligent Partnership

This section takes a look at the state of the Business Relief market based on the number of offers in the market. Unless otherwise stated, this analysis uses data obtained from the MICAP platform and is correct as of 10 March 2023.

he current economic climate has brought the cost-of-living crisis to the forefront of public attention. With inflation still running at 8.8% and uncertain support for businesses, many are struggling to stay afloat.

This is especially true for family businesses, who face rising costs for energy, transportation, raw materials, and wages, while consumers have less disposable income to spend.

In these challenging times, investing in Business Relief (BR) can offer a potential solution.

BR is a tax relief designed to help small and medium-sized businesses by reducing the amount of inheritance tax due on their assets. This can provide a significant boost to business owners who are looking to pass on their assets to future generations.

Investing in BR-qualifying companies can also provide a potential hedge against inflation and recession. By investing in companies that are less vulnerable to economic downturns, investors can protect their portfolios from market volatility.

Being typically illiquid, BR investments are less affected by short-term market fluctuations. Moreover, BR-qualifying companies often invest in assets that have intrinsic value and are less susceptible to inflation. This includes investments in property, renewable energy, and infrastructure, which tend to hold their value even in times of economic uncertainty.

Overall, investing in BR can offer a potential solution for businesses looking to navigate the challenges posed by inflation and recession. By diversifying risk and investing in assets that are likely to hold their value in the face of economic uncertainty, investors can protect their portfolios and provide a boost to their businesses. It is important, however, to ensure that by diversifying risk, business owners do not jeopardise their BR status.

Now, let’s take a closer look at the investment prospects that are available in the BR market for prospective investors.

BR is a tax relief designed to help small and medium-sized businesses by reducing the amount of inheritance tax due on their

Open offers: a gradual uptick

The data suggests a bright outlook for EIS, offering hope for investors aiming to take advantage of the UK’s most ambitious

The BR sector has remained strong in the face of the current economic challenges, with 70 offers currently open, which continues the steady progression we saw in our previous analysis. There were 65 open offers in April last year and 69 in September.

The current open offers adopt four major investment strategies: growth (by 39.7% of the open offers); capital preservation and growth (39.7%); growth and income (17.6%); capital preservation and income (2.9%).

Managers appear to have a preference for sectors that have the potential for growth in the current climate of inflation and global tensions (97% of the offers are focused on growth).

This allocation strategy is particularly effective in BR, where there are relatively few sector restrictions (with the exception of businesses dealing mainly in securities, stocks or shares, land or buildings, or the making or holding of investments).
The current regulations permit a broad range of BR-eligible investments for UK investors, including forestry, renewable energy (such as solar and hydro power), property finance, and asset-backed businesses like pubs, health clubs, and hotels.

Additionally, stocks listed on the Alternative Investment Market (AIM) generally qualify for BR relief. BR offers investors the opportunity to hedge their investments by investing in businesses that are likely to thrive during periods of inflation. Some underlying investments that qualify for BR have a positive correlation with inflation, such as shorter-term loans with regular rate negotiations.

The BR sector has remained strong in the face of the current economic challenges, with 70 offers currently open, which continues the steady progression we saw in our previous analysis.

Investee companies: zeroing on growth and security

Diversification

The open offers invest in AIM-listed companies (55.7%) and asset-backed companies (44.3%).

The strategies suggest that BR managers are prioritising growth and security, which are two critical factors during a period of inflation:

Shares on the Alternative Investment Market (AIM) are often seen as offering an easy opportunity to pass on wealth to the next generation without incurring Inheritance Tax (IHT). In principle, an investor buys AIM shares which qualify for BR, survives for more than two years, and then passes them on to their children by Will.

Asset-backed companies carry a significantly lower risk of complete capital loss since the assets used to secure the investment can be utilised to offset any capital losses caused by defaults.

Rising inflation underscores one of the most important lessons of investing: portfolio diversification is critical to investment success. Diversifying one's investments across multiple asset classes can mitigate the risk exposure.

BR provides tremendous opportunities for diversification. The current open offers invest in 16 companies on average, across a wide range of sectors, aiming for growth and diversification.

In reality the average number of investee companies can be higher than 16. This is because the tally includes managers who use single companies as an investment vehicle. What happens is that a significant number of BR investment managers establish a single company, in which investors can become shareholders, and subsequently invest in third-party BR-qualifying companies.

Target returns

Charges

March 2023

September 2022

% change

Initial Charge to Investors Excluding Adviser Fee

Initial Charge to Investee Company

Total Initial Charge

AMC Charged to Investor

AMC Charged to Investee Company

AMC

Annual Per Fee

Exit Per Fee

Annual Per Hurdle

Exit Per Hurdle

Initial Deal Fee

Exit Deal Fee

Annual Admin Charge

0.90

0.30

1.18

0.88

0.35

1.18

0.71

0.14

0.26

1.42

0.44

0.49

0.30

+2.22%

-33.33%

-5.08%

+1.14%

No change

+1.69%

No change

No change

No change

+2.38%

+6.82

+6.12%

No change

0.92

0.20

1.12

0.89

0.35

1.20

0.71

0.14

0.26

1.43

0.47

0.52

0.30

The average return per open offer is 4.45%. However, as stated in our previous report, the target returns vary by investment strategy. Presently, open offers aim for a maximum return of 7% for Capital Preservation and Growth, and up to 10% for both Growth and Growth & Income.

Despite significant market challenges, it implies that certain open offers are still striving for returns that surpass inflation.

THE CLEARER MARKET ENVIRONMENT POST-BREXIT, AS WELL AS A TIGHTER GRIP ON THE PANDEMIC, CREATES AN OUTLOOK CONDUCIVE TO INCREASED LISTINGS ON AIM.

- VAN HOANG, INVESTMENT MANAGER, BLACKFINCH

Fees and charges

Many advisers report seeing clients question fees amid the inflation. In a recent survey, more than a third (39%) of advisers said clients are less willing or unable to pay fees due to inflationary pressure.

So, perhaps it’s no wonder that many of the fees charged by the open BR offers have remained unchanged since our last analysis in September. Among those that have changed, initial charge to investee companies stands out, declining by a third (33.33%).

Photography by 
Interview by

Minimum subscription

MOHAMED DABO

intelligent-partnership.com

mohamed@intelligent-partnership.com

Senior Editor,
Intelligent Partnership

For its intended purpose, BR remains relatively inexpensive. As noted in our previous report, the minimum subscription for open offers is typically £25,000, but it can be as low as £15,000. However, even a £15,000 investment in BR can result in savings of £6,000 in IHT.

The government's latest alterations to its tax budget will sustain the positive progress that the VCT sector has achieved in recent years.

In the future, the significance of VCTs in the UK's financing environment is projected to grow as investors seeking to invest in the future of UK SME businesses, admist geopolitical and economic instability, are drawn to these vehicles due to the important tax incentives they continue to offer.

MOHAMED DABO

intelligent-partnership.com

mohamed@intelligent-partnership.com

Senior Editor,
Intelligent Partnership

Case study of a young BR investment manager

Case study of a young Business Relief investment manager

eing the new kid on the block is not easy when starting any fund. It takes persistence, commitment and belief. Not to mention expertise.

While these are attractive qualities, the lack of track record (even though past performance is not necessarily an indicator of future performance) can be a massive roadblock for potential investors. On the other hand, there are actually some notable positives and Business Relief (BR) funds are no exception:

At any one time there are over 60 offers open in the BR market (MICAP). This makes for a fairly broad selection, but any additional diversification opportunities are to be welcomed, particularly when it is considered best practice to diversify investments across a number of managers because of the similarity of sectors that many focus on.

New funds will not experience the legacy issues that others may have done. For example, there is little possibility that among the existing investments are some that may not yet have been sufficiently down valued to reflect their true value in current circumstances.

Extra incumbents mean more competition that can bring prices down and service levels up. Take Zenzic Capital, for example, an investment manager that entered the BR market just a couple of years ago. It offers an eye-catching target return of 6% per annum, well above the average of 4.45%.

New funds will not experience the legacy issues that others may have done.

New offerings do not have to spend the time, energy and ultimately expense (management time doesn’t come free) spent to oversee issues of investments from years ago. This allows for greater concentration on finding the best current deals.

Some new managers can bring experience and expertise from previous activities in the BR-qualifying trade. A good example of this is Zenzic with their real estate lending service which they have been running outside of a BR wrapper for close to a decade. Zenzic has carried out lending on real estate projects totalling more than £150m in value, as well as advising on projects worth more than £1bn during the same period.

They may also carry over relationships with relevant professionals like financial advisers who have enough trust in them from working with them previously, that they are prepared to be early investors, when the AUM of the BR fund is minimal. This is a great sign for other investors and is the case for Zenzic, whose first £10 million of investment reflects this confidence.

Of course, building a successful BR fund takes time, with eventual focus on successful deaths – where BR was successfully claimed and IHT relief confirmed. But before all of that, the tax tail shouldn’t wag the investment dog, so performance is key. For Zenzic, that’s progressing exactly as its experience expects. Target returns are being met, and in fact projected to be exceeded over the next 12 months. All underlying loans are performing, and the pipeline of new projects is healthy.

Some new managers can bring experience and expertise from previous activities in the
BR-qualifying trade.

MORE AIM POSITIVITY

Unleashing the power of technical support

According to EY, global IPO volumes rose 87% and proceeds rose 99% year-on-year in the third quarter of 2021. A key drviver was the rebound of the IPO markets in Europe, Middle East, India and Africa

Unleashing the power of technical support: does your Business Relief manager offer expert help to achieving clients’ planning goals?

By Sean Burrows, Regional Account Manager, Stellar Asset Management

BR manager expertise can powerful

  nvestment advisers are constantly looking for ways to optimise
their clients' investment strategies, particularly when it comes to estate planning.

One powerful tool that financial advisers can leverage is Business Relief (BR). But investing in BR is not without its challenges. The technical aspects of the estate planning tool can be complex, especially when combined with other IHT planning methods.

This is where BR managers can help financial advisers achieve their investment and tax-planning goals. The managers can bring a wealth of specialised expertise to the table, allowing advisers to make informed decisions and take advantage of the opportunities presented by BR.

Stellar Asset Management is a good example of a BR provider whose level of technical support goes beyond what you’d expect from a manager of its size.

Sean Burrows, Regional Account Manager for Central, West, and South England is a former adviser, compliance manager, head of a major insurance company’s life and trust department and specialist in IHT advice, with 25 years of experience. He shares the sort of technical and practical expertise that can be invaluable to advisers:

The managers can bring a wealth of specialised expertise to the table, allowing advisers to make informed decisions and take advantage of the opportunities presented by BR.

Ensuring healthy adoption

Unfortunately, transforming our healthcare systems is not merely a case of simply implementing technology. Adoption is crucial. Previously, a catalyst was lacking for the mass adoption of an expansive form of digital healthcare. This catalyst came in the form of the pandemic, which shifted behaviours and supercharged innovation. The pandemic revealed the enormous pressure on healthcare systems and structural inefficiencies. The net outcome was a realisation that things needed to be done differently. Working from home and social distancing practices made old models of care, such as GP visits and certain types of in-patient hospital care visits, suddenly seem inefficient and prohibitively costly. The behavioural change swept away traditional ways of thinking about healthcare delivery. For example, the pandemic tailwind for adoption has supported the wider embrace of tech-led delivery models that harness technology to enable remote monitoring and testing. These delivery models can improve diagnosis and screening, as well as the timing of interventions, while boosting operational efficiency and lowering costs.

At the intersection of healthcare and technology, advances in 'healthtech' are driving down costs, while improving patient access and outcomes.

Encouraging advisers to consider the broader context and innovative planning ideas

Actionable specifics that enable advisers to implement minor adjustments with significant effects

It’s important for advisers to look at the bigger picture and not just focus narrowly on Business Relief. Sean’s knowledge and experience allow him to offer a holistic view of a client's situation, enabling advisers to identify potential issues and opportunities that may have been overlooked.

Sean cites the case of an adviser who was looking at EIS and SEIS solutions for a CGT bill in the event of their client, a director, selling their business. “Both of these products are very useful in their design but their lack of liquidity, after further discussion, would not meet all the clients’ needs for the capital and to cover the CGT liability.” The answer? “Corporate Business Relief can be used for both IHT and CGT purposes, in some circumstances, and this allowed us to look at a solution that not only deferred capital gains but also provided for the liquidity that the client needed.”

Sometimes a small adjustment can make a big difference. For instance, there is a simple way to extend the 0% trust periodic charges applicable to BR-qualifying shares held in trust, even when their value has been realised and the funds used by the trust to acquire alternative non-BR-qualifying assets: “The settlor should write to the trustee to ensure the BR-qualifying assets are retained in the trust for at least seven years, so that, if they die within seven years of settling them into trust, they don’t come back into charge as a failed PET. But preferably, the minimum holding period by the trust should be 10 years + 1 day,” explains Sean. He goes on, “this is because BR-qualifying assets are exempt from periodic charges and any periodic charges over the next 10 years, no matter what the trustees invest the asset value in during that period, are determined by the charge applicable at the last tenth anniversary of the trust.”

Pandemic problem-solving

The irony of the pandemic is that its legacy might not be how it diminished our healthcare systems, but how, ultimately, it made them more resilient. It has also deepened the investment case of digital care in the UK. For context, the UK is home to the largest number of digital health start-ups in Europe since 20101 . With a combination of early-stage venture capital and re-affirmed NHS goals towards a digital care future, we see the opportunity set widening further.

There are still challenges, however. Adoption is accelerating but it won't happen overnight. For the next few decades, we will need to see doctors, nurses, and other healthcare professionals work in symphony with technology- this is the key to unlocking the power of cutting-edge digital solutions.
This means developing clinical solutions that can be incorporated into existing workflows and achieving immediate practical impact. By leveraging technology in smarter ways, we can improve access to high-quality care - but also drive out costs and inefficiencies. Solutions need to be intuitive and seamlessly flow into existing practices. At an inception level, collaboration is vital.

We need to create an ecosystem where private capital can engage with start-ups and early-stage companies to enable stakeholders, from software engineers to clinicians, to work in concert. This will then allow them to leverage the NHS and other healthcare systems to provide sustainable value-added solutions and deliver quality care.

We need to create an ecosystem where private capital can engage with start-ups and early-stage companies to enable stakeholders, from software engineers to clinicians, to work in concert.

Client-centric, Consumer Duty compliance

The level of service and value in the technical expertise that experts like Sean can offer aligns with the requirements of the Consumer Duty, which aims to generate the best outcomes for clients.

It also demonstrates the commitment of BR managers like Stellar Asset Management to help advisers help their clients achieve their financial goals and protect their wealth for future generations.

Scaling solutions

Bigger impact

The scale of the challenge ahead requires early-stage innovation. This is happening. 2021 was considered a breakthrough year for healthtech and biotech, with a global record amount of venture capital investment to the tune of $79 billion.

Healthcare also remains one of the least digitalised sectors, leaving plenty of room for growth. However, we must be able to scale solutions if we are to tackle significant challenges such as an ageing population.

Our focus is on supporting tech-led companies further up the early-stage curve with established revenues. The themes of these innovative leaders range from robotics that prepare surgeons for the operating room to enhanced imaging technology -such as, real-time images from ultrasounds can be cleaned using algorithms that move imaging from 2D to 3D. This allows clinicians to get a more accurate picture and better plan for interventions. It also reduces surgery downtime and the need for CT scans or X-rays. By making the process more real-time, surgery times can be cut by 20-30%, which ultimately means more patients going through the operating theatre.

The impact of technology will become more obvious as it is adopted and, arguably, the impact will be far more significant in the clinical environment than for therapeutics. Over the next decade, robust data will reveal the scale of change.

We see the greatest impact in three ways: better access to clinical care; improved clinical outcomes for patients; and reduced costs. Ultimately, however, the best indicator of positive impact will be improved quality of life for patients.

The pace of digital adoption in healthcare is driving more investors into the space. The healthtech revolution is just beginning, but we are already seeing how it can transform the healthcare experience.

Sean Burrows

www.stellar-am.com
enquiries@stellar-am.com

Regional Account Manager
Stellar Asset Management

Dr Nigel Pitchford

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