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Industry Update | February 2024
Business relief
Taking the path less trodden - a differentiated BR solution
Under the bonnet of the Puma Heritage Estate Planning Service
Common client scenarios for Business Relief
Thought Leadership
Five reasons why now’s a good time to talk Business Relief with your clients
Interest rate trajectory and impact on real estate
AIM performance and stock selection
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Introduction
Market Update
Considerations for Investment
Industry Analysis
Managers in Focus
What's on the Horizon
Further Learning
The BR universe today
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learning objectives
The Business Relief (BR) universe today
Business relief (BR) has become increasingly more relevant in the current financial climate, as individuals and families focus on mitigating their inheritance tax (IHT) liability.
As the monetary cycle takes a turn, interest rate cuts will shape the UK’s economic landscape this year. There’s still the looming threat of a mild recession, despite November’s slight growth. This dance between interest rates and economic growth will doubtless have an impact on the Business Rate universe, though sectors such as real estate look set to benefit from the rate cuts. In 2023, inheritance tax receipts soared to unprecedented heights, setting a benchmark for the coming years. Intergenerational wealth transfer is becoming an increasingly significant aspect of the economic narrative and policymakers might find themselves at a crossroads, particularly in the light of a forthcoming general election. Despite heightened awareness, it's evident that inheritance tax (IHT) remains a persistent financial planning concern. Addressing various aspects of estate planning is crucial, including exploring investments eligible for Business Relief.
Now is a great time to talk to your clients about Business Relief and one manager makes a strong case for including this in your estate planning conversations right now. In Taking the path less trodden, one manager talks about how to gain market share in a crowded competitive space. It’s real food for thought. In Under the bonnet of the Puma Heritage Estate Planning Service (EPS), one manager talks long-term attractive returns and institutional-grade lending. In Five reasons why now’s a good time to talk Business Relief with your clients, we look at the importance of having that conversation around Business Relief-qualifying investments. Common client scenarios for Business Relief addresses some of the reasons clients struggle with real estate planning and how to tackle them. In AIM performance and stock selection: understanding what specialist AIM BR managers do, one manager drills down into how an active stock picker looks to outperform the index. “As the nation adapts to evolving economic conditions, the hope is that prudent policies and a resilient economic foundation will foster stability and contribute to a trajectory of growth in 2024,” writes one manager in Interest rate trajectory and impact on real estate.
br UNIVERSE
The BR Universe Taking the path less trodden Under the bonnet of the Puma Heritage Estate Planning Service (EPS) Five reasons why now’s a good time to talk Business Relief with your clients Common client scenarios for Business Relief AIM performance and stock selection: understanding what specialist AIM BR managers do Interest rate trajectory and impact on real estate About Intelligent Partnership
The small-cap effect - a sleeping giant?
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The BR Universe Taking the path less trodden Under the bonnet of the Puma Heritage Estate Planning Service Five reasons why now’s a good time to talk Business Relief with your clients Common client scenarios for Business Relief AIM performance and stock selection: understanding what specialist AIM BR managers do Interest rate trajectory and impact on real estate About Intelligent Partnership
www.stellar-am.com enquiries@stellar-am.com
Head of Third-Party Relations, Stellar Asset Management
John Fearon
- Van Hoang, Investment manager, Blackfinch Investments
The clearer market environment post-Brexit, as well as a tighter grip on the pandemic, creates an outlook conducive to increased listings on AIM.
Taking the path less trodden – a differentiated BR solution
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Taking the path less trodden
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Smaller stakes have little choice
Unfortunately, individual retail investors are unlikely to hold a large enough stake to change the outcome of these votes. But, on the other hand, in the vast majority of takeovers seen in the first half of 2021, there was a substantial bid premium where the share price increased during the offer period. The highest was an eye-watering 79%, although more commonly, it was in the lower, but still very pleasing 20% - 50% range.
role, Intelligent Partnership
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Inheritance Tax: The future
Jonathan Gain
By John Fearon, Head of Third-Party Relations, Stellar Asset Management
The BR Universe The inheritance tax net is widening and growing your estate planning business is a key opportunity Have smaller companies reached their turning point? Downing - Meet the Manager Inheritance Tax: The Future Under the Bonnet: Focus on AIM The adviser benefit of using client IHT planning scenarios Product in focus: The Zenzic Estate Planning Service About Intelligent Partnership
FAs are rewriting the playbook when using Business Relief (BR) services to mitigate IHT. There’s been a noticeable shift, steering away from a reliance on a singular service provider to deliver the entire solution. Instead, the trend is towards risk diversification, creating client portfolios that blend assets and, more noticeably, investment styles. Not long ago, the thought of mitigating IHT using a BR solution was considered esoteric, suitable only for the sophisticated and high net worth (HNW) individuals. There was limited choice, specialist knowledge and support that meant a few providers dominated and often a client’s entire BR portfolio was nailed to one service provider’s mast. Added to this was the ever-present concern that what the FCA might consider suitable today may turn out to be unsuitable tomorrow. The market was therefore narrow, providers were few and clients were indeed typically sophisticated HNWs. Today things are very different. The use of BR has become far more mainstream and the protocol around suitability better tested and accepted. The market has mushroomed, along with service providers, developing into a relatively crowded, competitive one with many new players jostling for market share.
And there’s the rub. In a crowded competitive space, how do you gain market share? Well, the answer isn’t as complicated as you’d think – it’s about standing out from the crowd, it’s about differentiation, it’s about taking the path less trodden. To that end the current intermediary trend of blending service provider portfolios is playing right into the hands of those very providers who choose to differentiate. As a boutique provider, we at Stellar know all about securing market share by being different, a portfolio diversifier. I always like to use a quote when presenting – and none sums us up better than this one from Howard Marks at Oaktree Capital: “If your portfolio looks like everyone else’s, you may do well or you may do poorly, but you can’t do different. And being different is absolutely essential if you want a chance at being superior.” Every facet of Stellar's approach is geared towards offering a differentiated, diversifying solution – being a part of the solution, not necessarily the entire solution. Choosing the path less trodden is ingrained in our ethos. Third-party data providers – such as market leading MICAP – have recognised this direction of travel and is designing tools that actively help intermediaries research, source, blend and execute a client portfolio using a series of differentiated individual services – building a portfolio not just on cost diversification but also stock crossover, sector exposure, asset preference/specialism and style. The “whole being greater than the sum of the parts” and all that.
Differentiation
If your portfolio looks like everyone else’s, you may do well or you may do poorly, but you can’t do different. And being different is absolutely essential if you want a chance at being superior.
We've outperformed...without taking on more risk
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There’s a lot of choice out there. With AIM you have services that are large-cap pointed, mid-cap screened, or smaller-cap biased; equally weighted, rigidly rebalanced or with looser weighting parameters; value preference, growth preference or a blend of the two (often with a bias); strategy uncapped or capped; concentrated and convicted or heavily diversified…the list goes on. Choosing a single provider for a client's £1m investment might therefore limit opportunities to dilute risk and optimise performance. Considering a mix of two or three providers, each contributing a unique element to the blend has to be a better idea and provide a more robust solution and subsequently, outcome. We recently did some research for an intermediary wanting to adopt such an approach for his AIM BR clients and found that some providers have significant stock overlap and style correlation meaning client outcomes were deeply correlated and the risk quotient far higher than expected. Some providers are 80% plus correlated. Stellar is typically sub-25%. Our AIM portfolio service, whilst being both sector and market cap-agnostic, has a clear smaller cap bias with a sub-£250m market cap sweet spot. It employs both a growth and value strategy entwined and has a greater than average number of investee companies that serves to reduce stock specific risk. Those companies are then expertly blended to make the portfolio as robust as possible in a number of differing economic outcomes, thus reducing volatility… a perfect component of any AIM BR solution.
The right blend
The same goes for asset backed. There is still a tendency to believe that only big is beautiful. But being small can be an advantage, allowing exposure to smaller, cheaper, below the radar projects that can cater for more niche markets…allowing a provider to buy quickly, manage well, sell into demand and recycle. Contrary to the belief that small is riskier, a concentrated and convicted barbell-style investment process, as seen in Stellar's Inheritance Tax Service (ITS), demonstrates otherwise. Despite having only nine assets compared to some competitors with 90, the service does not take on more risk. The investment process, featuring broad-based sector diversification, reduces NAV volatility. In the last six years we’ve seen a period of loose monetary policy, Covid, tight monetary policy, high inflation, escalating interest rates – a complete economic cycle. Not only has this concentrated service outperformed on a total return basis but has also exhibited lower drawdown than its competitors. We have, therefore, been the perfect foil for larger portfolios with multiple assets.
Size isn’t everything
There’s a lot of choice out there. With AIM you have services that are large-cap pointed, mid-cap screened, or smaller-cap biased; equally weighted, rigidly rebalanced or with looser weighting parameters; value preference, growth preference or a blend of the two (often with a bias); strategy uncapped or capped; concentrated and convicted or heavily diversified…the list goes on. Choosing a single provider for a client's £1m investment might therefore limit opportunities to dilute risk and optimise performance. Considering a mix of two or three providers, each contributing a unique element to the blend has to be a better idea and provide a more robust solution and subsequently, outcome. We recently did some research for an intermediary wanting to adopt such an approach for his AIM BR clients and found that some providers have significant stock overlap and style correlation meaning client outcomes were deeply correlated and the risk quotient far higher than expected. Some providers are 80% plus correlated. Stellar is typically sub-25%. Our AIM portfolio service, whilst being both sector and market cap-agnostic, has a clear smaller cap bias with a sub-£250m market cap sweet spot. It employs both a growth and value strategy entwined and has a greater than average number of investee companies that serves to reduce stock specific risk. Those companies are then expertly blended to make the portfolio as robust as possible in a number of differing economic outcomes, thus reducing volatility…a perfect component of any AIM BR solution.
lanning what happens to assets when you're no longer around can be pretty confusing and clients, naturally, have a lot of questions. It’s important that financial advisers are armed with the right answers before they begin the estate planning process. Here we go under the bonnet of our estate planning service with some of the most commonly asked questions that we get from advisers.
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Under the bonnet of the Puma Heritage Estate Planning Service (EPS)
What types of companies does Puma invest in through the Service?
Established track record of delivering consistent returns
We consistently deliver in excess of our target return of 3% pa with 0% capital losses to date. Our expert, in-house team have been tested through the 2008 financial crisis and the pandemic when they continued to deliver consistent returns.
Our investment strategy is solely as a property development lender, this focus makes us experts in our field and makes us a diversifier in the BR market.
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Puma Heritage Estate Planning Service (EPS) is a discretionary managed service and, as the Service’s investment manager, Puma Investments is responsible for identifying, monitoring and advising the Service’s portfolio companies in which funds will be invested. We target companies for the Puma Heritage EPS portfolio that we believe are capable of delivering long-term attractive returns for shareholders, where returns are underpinned by the value of real assets. In particular, the Service seeks to invest in companies that have a strong reputation for providing senior secured loans underpinned by real estate. In seeking to mitigate risk, portfolio companies of the Service focus on first-charge lending as part of their prudent underwriting approach. As our investment strategy is solely as a property development lender, this focus makes us experts in our field and makes us a diversifier in the BR market.
What effect does diversification have on the Puma Heritage loan book?
We are highly diversified across different geographies and sectors. We have covered more than 55 counties since our inception. This and our different loan terms (which range from up to 12 months to 36 months), help us maintain a conservative risk profile. The last three years have shown that unexpected headwinds can appear rapidly in certain segments of the economy. Our diversified loan book across different sectors, as well as regions across the UK, has positioned us well against this increased uncertainty.
Puma Investments has been subjected to significant scrutiny of its track record, processes and underwriting approach. We are proud of our long track record of success in secured lending which has enabled us to raise £500 million in funding lines from institutional investors. This provides reassurance that our processes, systems and controls have been thoroughly tested to institutional standards.
How do you ensure your processes are robust?
Target returns: 3% per annum
Simple access to investment
By investing in companies focused on short-term secured property loans the service regularly generates cash, creating natural liquidity. This makes it easier for you to access your investment, should you choose to.
Independent expert oversight
Puma Heritage Ltd benefits from an independent board of experienced senior directors with substantial lending expertise. Every loan requires the approval of the board.
A positive impact on society
An investment strategy that makes a positive impact on communities across the UK, lending to six developments that help improve social infrastructure, providing 2,100 care home beds, 2,200 student accommodation beds and 40 supported living facilities.
How important is the manager’s established track record?
Puma Investments has an established track record in advising companies undertaking secured real estate lending, as well as other trades that are underpinned by assets. Portfolio companies of Puma Heritage EPS benefit from the support of Puma Investments’ expert, in-house team, who have long-standing experience in the property finance industry as well as trades that are underpinned by assets. They also benefit from an independent board comprising highly experienced senior independent directors and panels of expert professional advisers. We are proud to have arranged real estate loans totalling in excess of £1.25 billion across over 650 individual loans, with no capital losses to date.
Care Homes
Residential
Commercial
Student Accomodation
Retirement Living
Co-living Developments
Serviced Apartments
Build-to-Rent
Hotels
To find out more about the Puma Heritage Estate Planning Service click here.
Our investment strategy is solely as a property development lender - this focus makes us experts in our field and makes us a diversifier in the BR market.
pumainvestments.co.uk businessdevelopment@pumainvestments.co.uk
Our sectors
Nurseries
For investment professionals only
Investor’s capital may be at risk. Past performance is no guarantee of future returns. Tax benefits are subject to change and depend on the individual’s circumstances. Puma Investments is a trading name of Puma Investment Management Limited (fca no. 590919) which is authorised and regulated by the Financial Conduct Authority. Registered office address: Cassini House, 57 St James's Street, London SW1A 1LD. Registered as a private limited company in England and Wales No 08210180.
hough much has changed in the world since 2009, the threshold for inheritance tax (IHT) has remained frozen in time since then. The amount your clients can leave to their loved ones – free from IHT – has stayed at £325,000 and hasn’t moved in line with inflation. The residence nil-rate band (RNRB), an additional allowance that applies to the family home has also remained frozen at £175,000. Amid rising inflation, this means the number of estates paying IHT is growing. In fact, as house prices and asset values have increased, it’s estimated that IHT will raise £7.8 billion for HMRC this year. This breaks all previous records and it’s forecast to continue growing. So, with more of your clients set to leave behind more valuable estates – and more tax for their beneficiaries to pay – now is the perfect time to talk about estate planning. Business Relief-qualifying investments should be part of that conversation. Business relief (BR) is different from the planning clients are likely to be most familiar with, like gifting and using trusts and it’s an option that shouldn’t be ignored.
The value of an investment, and any income from it, can fall as well as rise. Investors may not get back the full amount they invest. Tax treatment depends on individual circumstances and could change in the future. Tax relief depends on portfolio companies maintaining their qualifying status. The shares of unquoted and AIM-listed companies could fall or rise in value more than shares listed on the main market of the London Stock Exchange. They may also be harder to sell.
What are the risks to be aware of?
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octopusinvestments.com support@octopusinvestments.com
Head of Investment Products, Octopus Investments
Jessica franks
Notes
By Jessica Franks, Head of Investment Products, Octopus Investments
Here are five good reasons why it’s time to consider BR:
Inheritance tax receipts have been growing at a remarkable rate, by almost £1 billion a year.
Our research has shown that 76% of advisers said advising on estate planning, which includes BR, has led them to discover new assets. [4] IHT savings can be a brilliant way to articulate value and gain referrals.
1 Inheritance Tax thresholds and interest rates 2 Inheritance tax payments forecast to hit new high 3 The Great Wealth Transfer 4 Octopus Investments ‘Unlocking estate planning’ webinar, March 2020
#1
Speed, access and control
When your client buys shares in a company that qualifies for BR, they can be passed on to their loved ones – free from IHT – upon death. This is as long as your client has held (and still holds) the shares for two years at their time of passing. In comparison to gifting, which takes seven years to become completely free from IHT, BR is much faster. It also offers your client more control of their investment. After all, a gift is irreversible, whereas a BR-qualifying investment stays in your client’s name during their lifetime. This means they can access and sell down their shares at any time they need, subject to liquidity. And this can be very reassuring during the current cost-of-living crisis, where clients may need access to their investment for example to fund care home fees. Something to keep in mind: please remember that the value of a BR-qualifying investment, and any income from it, can fall as well as rise. Investors may not get back the full amount they invest.
Different solutions for different clients
BR isn’t just for one type of client with one objective. Your client might be looking for high growth. These clients often find AIM-listed BR portfolios attractive because of the growth potential and the ability to also hold AIM shares in an ISA if they want to leave their ISA free from IHT. Or, very commonly, and especially during this time of uncertainty, your client might want to target predictable growth while retaining access to their assets. In this situation, BR-qualifying investments in unquoted companies might be appealing – with their ability to target steady and predictable levels of return. Regardless of your client’s needs and objectives when it comes to BR, there are different solutions to explore, which is helpful particularly in the current environment. Something to keep in mind: the shares of unquoted and AIM-listed companies could fall or rise in value more than shares listed on the main market of the London Stock Exchange. They may also be harder to sell.
#2
The ongoing great wealth transfer
It’s predicted that £1 trillion of assets will pass down this decade. And £5.5 trillion is set to be passed down between 2022 and 2050. This means an unprecedented number of families could be impacted by inheritance tax. BR could help your affected clients plan their estate – and leave more to their loved ones during this transfer of wealth. Something to keep in mind: tax treatment depends on individual circumstances and could change in the future.
Consumer Duty and avoiding foreseeable harm
Under Consumer Duty, you need to think about what could happen that could harm clients and take steps to avoid this. In the context of inheritance tax, it is therefore key to consider the risk and harm of not doing estate planning, and to have these conversations even if your client chooses to not proceed. Many clients won’t realise that their estate now has a liability. And those clients who have previously acted on their estate planning needs may need to revisit it and do some more planning. For example, in the 25 years, to the end of 2022, the Nationwide House Price Index shows that UK house prices have risen by over 168%. So, inheritance tax is something many thought would never affect them, but their homes are now worth many multiples of what they paid for it.
#3
#4
The current price of AIM-listed shares
Shares listed on the Alternative Investment Market (AIM) can qualify for BR and they are currently trading at a sizeable discount to historical prices. This means investors could benefit from additional growth should share prices trend back to historic norms. Many UK companies continue to grow, export, and increase their revenues. Robust trading continues to be reported, companies remain well capitalised, and the outlook remains solid. So, we are seeing a disconnect between share prices and the underlying performance of companies presenting a significant opportunity. This is especially true of smaller companies, some of which qualify for BR. Something to keep in mind: tax relief depends on portfolio companies maintaining their qualifying status.
#5
It’s estimated that IHT will raise £7.8 billion for HMRC this year. This breaks all previous records and it’s forecast to continue growing.
The value of the investments discussed, and any income from them, can fall as well as rise. Investors may not get back the full amount they invest. Tax treatment depends on individual circumstances and tax rules may change in the future. Tax relief depends on BR portfolio companies maintaining their qualifying status. The shares of smaller companies are by their nature high risk, their share price may be volatile and they may be hard to sell.
A reminder of the key risks
BR-qualifying investments are not suitable for everyone. Any recommendation should be based on a holistic review of your client's financial situation, objectives and needs. This communication does not constitute advice on investments, legal matters, taxation, or any other matters. Issued by Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London, EC1N 2HT. Registered in England and Wales No. 03942880. Issued: November 2023. CAM013540.
For professional advisers and paraplanners only. Not be relied upon by retail investors
nvestments that qualify for Business Relief can address a range of different challenges that your clients might be facing. Here are five of the most common estate planning scenarios where these kinds of investment could be the solution your clients are looking for.
By Diana French, Retail Strategy Director, Triple Point
triplepoint.co.uk contact@triplepoint.co.uk
Retail Strategy Director, Triple Point
Diana French
Clients needing faster IHT exemption
The need for estate planning can become more pressing in situations where a client is at an advanced age or has received a medical prognosis that means their time to plan ahead is short. In these cases, traditional methods of estate planning such as gifting and trusts – which take seven years before achieving full exemption from inheritance tax (IHT) – may have only limited use or can be ruled out altogether. But with an investment that qualifies for Business Relief, the shares held by the client become exempt from IHT after they have been held for just two years (if still held upon their death). For many clients, this could well prove to be a much more achievable time frame compared to the seven-year wait required for gifts and trusts.
Clients looking for greater access and control
One of the reasons why some clients struggle with estate planning needs is because they are worried about losing control over their wealth, or simply don’t want to end up in a situation where they regret having given away their assets. In these scenarios, an investment that qualifies for Business Relief could help solve both access and control issues at once. Because the investment is held in the client’s name, they retain complete control of it throughout their lifetime. The money is theirs to do with as they wish, without signing it over to beneficiaries or giving it away. And they will still be able to access the capital, subject to liquidity, should their circumstances change – for example, if they find themselves facing unexpected care costs.
One of the reasons why some clients struggle with estate planning needs is because they are worried about losing control over their wealth.
Clients with a Power of Attorney in place
In cases where a client has a Power of attorney in place, estate planning can be difficult. Traditional strategies, such as gifting or settling assets into trust, will typically require approval from the Court of Protection. Even in cases where the Court of Protection does approve these requests, which can be a lengthy and expensive process in itself, it still takes a full seven years before those assets are fully outside of the client’s taxable estate. As with any decision an attorney makes, it should always be in the best interests of the donor and something the donor would have done. An attorney can make investments that qualify for Business Relief on behalf of the donor without having to apply to the Court of Protection for permission. Because investments are held in the client’s name, those assets haven’t been given away and are available to be withdrawn throughout the client’s lifetime. And should the client need income in the future, their attorney can arrange a sale of the shares (although shares sold will no longer qualify for Business Relief).
Clients that have sold (or are selling) a business
Business owners can sometimes be caught out when the time comes to sell their business, as the proceeds of the sale are part of their taxable estate. Even where the owner’s business qualified for Business Relief, that relief will have been lost following the sale. If the business qualified for Business Relief at the time it was sold and if the proceeds are reinvested into other companies that qualify for Business Relief within three years of the sale, the proceeds qualify for ‘Replacement Property Relief’. Once invested, the proceeds immediately become exempt from inheritance tax again, providing the total period of qualifying investments is at least two years out of the last five years and on death.
Clients who have settled assets into trust
A common estate planning strategy is to settle assets into a discretionary trust. While this allows the settlor to have control, they can be expensive and can take seven years to become exempt from inheritance tax. Any assets settled into a discretionary trust will also use up the Nil Rate Band, and where the amount is over £325,000 there is a 20% Chargeable Lifetime Transfer. Furthermore, the trust only becomes exempt from IHT after seven years and may also be subject to periodic charges. However, an investment that qualifies for Business Relief can be settled into a discretionary trust provided the shares have been held for the minimum two-year period. There’s no Chargeable Lifetime Transfer charge on entry, and as long as the shares are held within the trust there’s no further inheritance tax charge to pay, even if the client dies within the first seven years of it being created.
Using estate planning scenarios with your client bank
As these scenarios confirm, Business Relief can be suitable for clients facing a range of estate planning issues. To discuss these scenarios in greater detail, visit our dedicated online estate planning page at tpeps.triplepoint.co.uk.
Important information
For professional financial advisers only. The investments discussed in this article are not suitable for all investors. Tax treatment depends on the individual circumstances of the investor and is subject to change. Tax reliefs depend on the investee companies maintaining their qualifying status. This article has been issued by Triple Point Administration LLP, which is authorised and regulated by the Financial Conduct Authority under firm reference number 618187.
BR under the bonnet: AIM focus
time-investments.com questions@time-investments.com
Head Of Equity Funds, TIME Investments
Raymond Greaves
AIM performance and stock selection: understanding what specialist AIM BR managers select
Over the last decade, overall AIM market performance has been poor – in the 10 years to January 2023, the AIM All-Share returned about 32%, including reinvesting dividends. This is equivalent to a compound annual growth rate of 2.8%. Not exactly high growth. But this is very much an active stock pickers’ market and they should be looking to outperform the index. So, how do they do that?
AIM performance and stock selection: understanding what specialist AIM BR managers do
By Raymond Greaves, Head Of Equity Funds, TIME Investments
Risk warnings The information contained in this email does not constitute and should not be construed as constituting investment or tax advice by TIME. Past performance is not necessarily a guide to future performance and there is no guarantee that the target return objectives of TIME:AIM will be achieved. You should recognise that your clients' capital is at risk and investors may get back less than they invest. The levels and bases of, and reliefs from, taxation may change in the future. Any favourable tax treatment, such as Business Relief, is subject to Government legislation and as such may change.
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Important information The information contained in this feature does not constitute and should not be construed as constituting investment or any other advice by TIME Investments. There is no guarantee that the target return objectives of TIME:AIM will be achieved and investors should recognise that their capital is at risk and they may get back less than they invest. The levels and bases of, and reliefs from, taxation may change in the future. The levels and bases of, and reliefs from, taxation may change in the future. Any favourable tax treatment, such as Business Relief, is subject to government legislation and as such may change.
An 'investment grade' bucket, where the company is large enough to be of interest to institutional investors - thus giving it proper access to capital. It would also have a quality Nomad, have a demonstrated track record of growth, a strong market position and consistent profitability. For me the investment grade/ speculative cut-off is around £100 million market value, possibly a little lower - there are certainly some interesting businesses up and coming in the £50-100m bracket. So as someone who wants to invest - not speculate - my opportunity set on AIM is probably around 200 companies. In other words, less than 30% of all AIM companies.
A 'speculative' bucket, which would consist of everything else, which is likely to be subinstitutional in size, have a patchy growth track record and may not yet be profitable.
Of the close to 800 AIM companies in August 2023, 234 (or 30%) were in oil, gas, coal, mining and investment banking.
Some sectors do not attract Business Relief and so are obviously excluded. But others can be more unpredictable, leading to managers like TIME, excluding them. For example banks, insurance, mining and oil and gas and other commodity plays that are largely driven by unknowable economic factors. Of the close to 800 AIM companies in August 2023, 234 (or 30%) were in oil, gas, coal, mining and investment banking. This gives a much more manageable number of companies to deal with. While this is still around 200 companies, it allows performance tracking relative to AIM as a whole. TIME’s criteria to this point have resulted in a cohort that has outperformed AIM as a whole every year since it launched in 2016, except for 2017 and 2020, with better risk-adjusted returns.
Narrowing it down further
There also needs to be some sort of judgement on quality. Applying the investment style can be done quantitatively or qualitatively; focusing on the operational and valuation metrics of a company or working on softer factors such as trying to judge the quality of a company's strategy, its competitive positioning and the effectiveness of its management through meetings and 'gut feel’. In reality, an investment manager is likely to be qualitative based with a quantitative overlay, or quantitative based with a qualitative overlay, but the manager should have reasoning behind their choice. For TIME, it’s the latter. It tends to mean that an investment strategy can be applied more consistently over time, preventing style-drift. Analysis by TIME of its ‘investable AIM’ BR space vs the main UK market earlier this year found that the former is forecast to grow its earnings much faster than the rest of the UK market, 8.7% compound over the next two years against 5.7% for the rest of the UK. Of course, advisers need to question any analysis of this sort, checking what assumptions are made and why, but it’s an encouraging calculation suggesting that active managers can add substantial value to AIM investing.
Investment grade bucket
Speculative bucket
Drilling down further depends on the manager’s investing style:
Growth investing tends to mean selecting those businesses with the highest revenue or earnings growth rates. Value investing tends to mean selecting those businesses with the lowest price-to-earnings ratios. Income investing tends to mean selecting those businesses with the highest dividend yields.
We can carve up the AIM market of today into two distinct buckets:
The adviser benefit of using client IHT planning scenarios
CASE STUDY
Zenzic completed a £1.1m mezzanine facility provided through equity release to support an established SME housebuilder, in a development project. This project included 25 units, featuring a mix of 1 commercial unit, 16 private units, and 8 affordable units. Prior to executing the investment, Zenzic conducted a rigorous and comprehensive due diligence process spanning over three months. This exhaustive analysis encompassed an in-depth evaluation of the project's location, demographics, planning considerations, property valuations, as well as an assessment of the developer’s financial strength and the expertise of its management team. Zenzic’s risk management and mitigation analysis ensured a thorough understanding of potential challenges and allowed it to devise proactive strategies to safeguard the investors' interests. In a remarkable nine months ahead of the maturity date, Zenzic successfully exited the investment. This exemplifies our commitment to diligently managing investments and proactively capitalising on favourable market conditions when prudent, to enhance returns for our valued investors. This project marked Zenzic's second collaboration with the developer, following a highly successful debt offering in 2020, which was successfully redeemed in 2021.
PORTFOLIO CASE STUDY
zenziccapital.com | zenziceps.com info@zenziccapital.com
Managing Partner, Zenzic Capital
Thomas lloyd-jones
By Thomas Lloyd-Jones, Chief Investment Officer, Zenzic Capital
year ago inflation was close to 10% and there was real concern that the interest rate hiking cycle was far from finished. In the early days of 2024, there is a prevailing sentiment in the UK’s financial landscape that interest rates have reached their peak and are poised to undergo a downward adjustment. This anticipated decline in interest rates is expected to inject renewed vigour into the real estate market, acting as a catalyst for an upswing in asset prices. As interest rates decrease, the cost of borrowing diminishes, making real estate investments more attractive and accessible to prospective buyers, investors and developers alike. The prospect of lower mortgage rates is likely to stimulate demand for property, fostering increased activity in the housing market. This potential shift in the interest rate environment is not only anticipated to benefit homeowners looking to refinance at more favourable terms but also to invigorate the broader real estate sector, creating a positive ripple effect throughout the economy. Investors and homeowners alike are eagerly eyeing this forecasted change, anticipating a positive impact on the UK real estate landscape in the coming year.
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As the nation adapts to evolving economic conditions, the hope is that prudent policies and a resilient economic foundation will foster stability and contribute to a trajectory of growth in 2024.
As 2024 unfolds, the economic outlook for the United Kingdom remains challenging to predict with absolute certainty, given the complex and dynamic global economic landscape. However, there is cautious optimism among economists and financial commentators regarding the country's growth prospects. Factors such as improving consumer confidence, robust employment figures and stimulatory fiscal measures will contribute to a more positive sentiment. While challenges such as geopolitical uncertainties and potential global economic fluctuations persist, many analysts express confidence that the UK is well-positioned to navigate these headwinds. As the nation adapts to evolving economic conditions, the hope is that prudent policies and a resilient economic foundation will foster stability and contribute to a trajectory of growth in 2024.
Growth prospects for UK PLC
In 2023, the United Kingdom experienced a surge in inheritance tax receipts for the Exchequer, encompassing both traditional estates and gifts. Official statistics reveal that the total inheritance tax paid in the UK during 2023 was £7.09bn, a substantial increase (17%) on the £6.05bn paid in 2022 and surpassing all previous fiscal years by a significant margin. The surge in receipts can be attributed to a combination of factors, including the appreciation of asset values, especially in real estate markets. Absent any legislative change, inheritance tax is on course to deliver £9 billion for the Treasury by 2027/28. With both the Standard and Resident nil rate bands remaining frozen until at least April 2028, and compounded by house price inflation, more people are finding that when their house becomes unencumbered by a mortgage it takes up most if not all of their nil rate bands.
Inheritance tax receipts surge
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Our dedicated programme includes a variety of in-person and virtually hosted events, across the country. Supporting financial advisers and the tax planning community, we facilitate knowledge building of tax wrappers in a workshop environment. We host webinars and conferences that focus on specific areas of tax and estate planning and celebrate the role of the UK SME investment and finance communities through our annual Growth Investor Awards.
Our CPD tax planning online accreditation programme is aimed at regulated advisers, wealth managers, paraplanners, accountants and solicitors that require a recognised level of knowledge and understanding in EIS, SEIS, VCT and Business Relief. accreditation.intelligent-partnership.com
Free, award winning series including EIS, VCT and BR offering ongoing observations and intelligence, the latest thoughts and opinions of managers and providers. intelligent-partnership.com/ research-format/publications
