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Industry Update | July 2023
Business relief
Meet the Manager - Tom Lloyd-Jones, Zenzic Capital
Meet the Manager - Raymond Greaves, TIME Investments
The inheritance tax net is widening and growing your estate planning business is a key opportunity
Thought Leadership
Dispelling five myths about Business Relief
Managing AIM portfolios in times of market volatility
IHT planning: diversifying portfolios with social care
Diversifying through SME finance: reduce risk in your BR portfolio
Why money really can grow on trees
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Against a backdrop of recent rises in asset values, higher volumes of wealth transfers during the Covid-19 pandemic, and the government’s decision to keep the nil rate band frozen at £325,000 until at least April 2028, more and more families are slipping into the IHT net. In this issue, we talk to Tom Lloyd-Jones, Managing Partner at Zenzic Capital in Meet the Manager, to discuss their experience as a new kid on the block in the Business Relief landscape. In another feature of our Meet the Manager series, we caught up with Raymond Greaves, Head of Equity Funds at TIME Investments, who takes a closer look at the Alternative Investment Market (AIM) and how as a manager they cherry pick the best companies for investment. Dispelling five myths about Business Relief, dives into the misconceptions surrounding qualifying Business Relief investments and sets the record straight for investors considering their tax-planning. Understanding how to make the most of the Business Relief growth opportunity and deliver good outcomes for clients is examined closely in The inheritance tax net is widening and growing your estate planning business is a key opportunity. One manager makes a case for why investment into UK social care represents a compelling long-term growth opportunity in IHT planning: diversifying portfolios with social care. In Managing AIM portfolios in times of market volatility, one investment manager explores the importance of portfolio diversification and the roles of IPOs within the marketplace. Did you know that commercial forestry is arguably one of the most well-guarded investment secrets in the tax-efficient space? Why money really can grow on trees takes a closer look at how investing in the sector can offer stable and predictable returns for an investor’s portfolio. In Diversifying through SME finance: reducing risk in your BR portfolio, one investment manager outlines reasons why investors should be given the opportunity to increase diversification in their portfolios, whilst being offered the opportunity to get ahead with estate-planning.
Introduction
Market Update
Considerations for Investment
Industry Analysis
Managers in Focus
What's on the Horizon
Further Learning
The BR universe today
The Business Relief universe today
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This industry update of the Business Relief (BR) landscape comes at a time where latest HMRC figures for 2023 demonstrate another record-breaking year of IHT receipts. There is a huge opportunity for financial advisers to discuss estate-planning options for clients and explore how investments that qualify for BR can help unlock capital preservation and growth opportunities.
learning objectives
Identify the main developments and news in the Business Relief market Recognise the various factors that will affect the Business Relief market in the coming months Analyse some key topics of particular relevance to the BR sector Outline some sectors and strategies that successful BR managers are leveraging
Readers can claim up to 2 hours’ structured CPD. Click here to claim your CPD. By the end of the update readers will be able to:
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Learning objectives for CPD accreditation
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The Inheritance Tax (IHT) landscape
The BR universe today Meet the Manager - Tom Lloyd-Jones, Zenzic Capital Meet the Manager - Raymond Greaves, TIME Investments Dispelling five myths about Business Relief The inheritance tax net is widening and growing your estate planning business is a key opportunity IHT planning: diversifying portfolios with social care Managing AIM portfolios in times of market volatility Why money really can grow on trees Diversifying through SME finance: reducing risk in your Business Relief portfolio Continuing Professional Development Growth Investor Awards - Final call for entries About Intelligent Partnership
The BR Universe today Meet the manager - Tom Lloyd-Jones, Zenzic Capital Meet the manager - Raymond Greaves, TIME Investments Dispelling five myths about Business Relief The inheritance tax net is widening and growing your estate planning business is a key opportunity IHT planning: diversifying portfolios with social care Managing AIM portfolios in times of market volatility Why money really can grow on trees Diversifying through SME finance: reducing risk in your BR portfolio Continuing Professional Development Growth Investor Awards: last call for entries About Intelligent Partnership
- 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.
Opening Statement Update Overview
1. INTRODUCTION
Market Composition Fees and Charges
3. Considerations For Investment
Are Hostile Takeovers A Danger To AIM? AIM In FCA’s Proposals
4. Industry Analysis
What Has The Market Been Doing? More AIM Positivity 2021 AIM Listing What's Driving the Market? The Autumn Budget 'AIM' for success, not perfection Focus Drives Pandemic Return Small is Beautiful Combatting Climate Change Health is Wealth What the Managers Say
2. market update
Amati Global Blackfinch Blankstone Sington Close Brothers Hawksmoor investment Puma investments Sarasin & Partners Stellar investment TIME investments Unicorn Comparison Table
5. managers in focus
More AIM-focused EIS Future Market Changes Considered What The Managers Say
6. what's on the horizon
Learning Objectives CPD and Feedback About Intelligent Partnership Disclamer
7. further learning
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role, Intelligent Partnership
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.
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The EIS universe today EIS: The smart money goes north Find the gems: The art of identifying and investing in resillient businesses Three need-to-knows about knowledge-intensive-companies EIS: A tool in the net zero journey, despite renewables ban How the rise of healthtech is transforming our healthcare experience Going for growth with EIS EIS open offers jump by 24% Regulation 2023: It's more than just Consumer Duty EIS dealflow: Building pipelines for funding success Bionic Arms for Ukrainian soldiers Continuing professional development About Intelligent Partnership
ur Programmes Director, Francesca Eastwood, recently caught up with Tom Lloyd-Jones, Managing Partner of Zenzic Capital. As a new kid on the block in the Business Relief (BR) landscape, we sat down with Tom to hear all about their real-estate BR investment offering and why they think now is a good time to move into the marketplace. Q: Hi Tom, thanks for joining us. You’ve been an active investor in the real-estate sector for many years now but have only recently moved into the Business Relief market. Could you talk us through the decision behind this and where you think the opportunities lie? Zenzic Capital has been a real estate credit provider for many years, reflecting the fact that we are a real estate credit firm who provides a BR product, rather than an IHT driven firm that happens to offer real estate exposure. All our investment team specialise solely in real estate credit and this deep sector expertise is what I think sets us apart from other market offerings. We launched our BR product in early 2020 to enable individuals seeking IHT shelter to benefit from our already established real estate credit platform. We saw an opportunity to offer a product which offered an attractive return irrespective of the IHT savings (which we felt should not subsidise investors’ returns). We target an annual 6% rate of return, which is well above the average 3-3.5% offered by other real estate BR products. On a wider macroeconomic level, the implications of rising IHT liabilities for families has also presented an opportunity for new BR products to enter the market. Latest figures from HMRC show IHT receipts have grown £1 billion year-on-year meaning that more families than ever are being caught by the IHT net. This follows an upward trend witnessed in recent years which shows no sign of slowing down. Q: A big part of your estate planning strategy requires that all real-estate loans are asset-backed. Could you explain to our readers what asset-backed lending is? Simply put, this is lending to a borrower (in our case, real estate), that then offers up real-estate as collateral on the loan. The idea of secured lending is that if the loan defaults for any reason, the lender can take possession of the asset against which it is secured, and sell it in the open market to realise value to repay their loan position. There is now a fair amount of academic research that shows that recovery rates are significantly higher for secured rather than unsecured credit and better still in cases where the loan is secured by real assets. This works very similar to securing a mortgage in the sense that the real-estate is at risk of repossession should a borrower default.
Q: Why could asset-backed lending be considered a good investment strategy for those thinking about their estate planning? Asset-backed lending can prove to be an effective underlying trade in BR as it provides predictable annual returns. In addition, the risk profile of the investment is reduced since there is recourse to the asset should the loan not perform. This helps the capital preservation attribute of the investment and enable liquidity within the portfolio should investors wish to withdraw capital. On a separate note, real-estate credit offers investors a broad market opportunity (we cover 20 different sub-sectors with varying fundamentals and attributes), that is uncorrelated to mainstream investment markets, with the benefit of hard asset collateral as a means of ensuring capital preservation. Q: What are some of the key characteristics you look for when choosing opportunities for investment? It’s a great question. At its simplest, we want a strong borrower, operating in a sector which we believe has good fundamentals and in which they can demonstrate a clear track record of performance. In addition, we want ‘skin in the game’ from the prospective borrower in the form of a meaningful cash commitment to the project. This both ensures we have day 1 subordinated value to provide us with a margin of safety if things go wrong and ensures that the borrower is incentivised to do their utmost to deliver on the business plan. Personally, I always look for a sensible entry price to the relevant real estate: if you get in at the right price it makes what follows that much easier. Q: Why do you think investors can trust Zenzic as a fund manager? Our track record of performance which is among the strongest, if not the strongest in the market is a quantitative measure that should give people some comfort. Although as ever, past returns are no indicator of future performance! We also have an exceptionally strong management team in place who are all real-estate specialists from high quality firms such as Brookfield, CQS, BarCap and EY. We also have a defined ‘space’ in the real estate market, focusing on higher growth sectors that offer real estate at affordable price points. We want to finance real estate with a deep buyer pool to mitigate exit risk as much as possible. Q: Finally, where are you finding some of the knowledge gaps when talking to advisers about BR? How do you provide support for those considering investments with Zenzic Capital? Our initial market research told us that fee structures were opaque and byzantine! This was something we really wanted to make sure we got right. We have done this by simplifying the structure so that no management fee is paid to Zenzic until investors have received a prescribed hurdle. We have found that many advisers are responding well to this and can see how closely aligned we are with our investors.
Meet the Manager
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Tom Lloyd-Jones Managing Partner, Zenzic Capital
On a wider macroeconomic level, the implications of rising IHT liabilities for families has also presented an opportunity for new BR products to enter the market.
Asset-backed lending can prove to be an effective underlying trade in BR as it provides predictable annual returns.
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Raymond Greaves Head of Equity Funds, TIME Investments
ur Programmes Director, Francesca Eastwood, recently caught up with Raymond Greaves, Head of Equity Funds at TIME Investments. It was an incredibly insightful discussion where we delved into his perspectives on the Alternative Investment Market (AIM) market, the intricacies of the TIME:AIM service’s investment process, and how as a fund manager, Raymond whittles down the whole of the AIM to cherry pick the best companies for investment. Q: Hi Raymond, thanks for sitting down with us. To kick things off, let’s talk about the financial planning community’s perception of the AIM market. 2022 was undoubtedly a rocky year across portfolios, have you found this challenging when speaking to advisers and where do you think some of the perception gaps lie? Absolutely, I think there is a common misconception that the AIM operates in a manner akin to the Wild West and is home to quite a few bad companies. What I think has been missed is that AIM as a whole has really matured as a market since it was first launched in 1995 and now hosts many excellent companies producing attractive returns. What I find useful when talking to advisers is by taking a top down view on AIM to explain how we find the good companies and weed out the bad. Q: Could you talk us through that a little more and your specific investment process? There are essentially three stages to our investment process. The first stage is whittling down the whole of AIM because there are a lot of companies to choose from - roughly 800, in fact. This is down from around a peak of 1,600 companies in 2007. Interestingly however, the average market cap of a company has increased circa four times since then, demonstrating just how far the market has come since the financial crisis. Anyway, we whittle down this 800 to leave us with our ‘investable universe’. We take quite a broad-brush approach to kickstart this process but generally our criteria starts by excluding any companies that have a market cap below around £100 million. Q: What’s the reasoning for your starting point to be a £100 million market cap? Are there not lots of companies on AIM below the £50 million market cap? Yes! About 60% of companies on AIM have a market cap below £50 million. It sounds like a fairly arbitrary number on the face of it, but it isn’t really when you think that many of the big financial institutions also won’t usually hold companies in a small cap fund under £100 million either. The main reason? Liquidity. The whole point of being a quoted company is to have the access to capital to grow your business should you need it. Companies that are sitting at around a £30 million market cap will not necessarily have institutional grade shareholders and therefore could struggle to raise capital.
Finally, we will not invest in a company where its revenue is essentially driven by commodity prices so for example, your classic oil and gas, and mining companies. The reality is that they are not in charge of their own destiny in the sense that they have no control over pricing. This process of defining an ‘investable universe’ tends to whittle down the entirety of AIM to a pool of around 125 - 150 companies that I can then begin to fish from to carefully curate a model portfolio of around 30 companies. Q: So once you have filtered out a large majority of the companies on AIM, how do you go about selecting your top picks from the remaining pool to build a portfolio? This is really down to our investment style. You’ll often find that fund managers either label themselves as ‘growth’ or ‘value’, it’s quite yin and yang. We argue a slightly different story and believe the most important factor to look out for is quality. And by this I mean that we focus on return on capital and the sustainability of those returns. Further, we prefer a company with low levels of leverage. Following this, we then do an extensive sense check across growth and valuation metrics. Usually if a company is appealing on these measures, then it’s likely to find a place in our model portfolio. Q: How do you maintain compliance within your investment portfolio and strategy? What defines us is that we’re very quantitative in the way we approach our investment strategy. I have been building investment systems my entire career to try and tease out the best opportunities from stock markets and apply them to run a portfolio. Since joining TIME, I’ve helped to refine and improve their existing investment process. Our quantitative system does a lot of the analysis legwork and helps us look out for red flags, for example, are there any funny movements happening on the balance sheet that we need to be worried about? This is why we are quantitative in our approach and can apply our process in a systematic way. Another great reason for having a well thought out system to apply to your investment process is that it ensures you can’t ‘style drift’ as a fund manager. I’m not accidentally going to start buying stocks that are considered deep value or massively high growth but with no returns attached to it, as our system will screen these situations out in the first place. It really helps me laser in on the companies that fit our investment strategy and I am then able to selectively spend time talking to management or going on visits. So, it’s a long way from being a black box approach, but it’s also a long way from us endlessly meeting companies and talking to brokers trying to tease out titbits of information and insights, a process preferred by some managers. We prefer to do the work ourselves. Q: Raymond, thank you for your time. This has been really insightful, do you have any final comments? To summarise, it’s quite simple. We filter all the companies on AIM into our own investable universe. These companies will be of appropriate size, profitable and not driven by commodities. This leaves us with a cohort of around 125 – 150 decent companies, from which we then pick our top 30 by focusing on quality factors. Finally, we then quantitatively assess if there are any potential red flags. This removes a lot of human error, avoids style drift and we can easily sense check by doing some meetings with management or site visits. And that’s it. There are some truly cracking companies out there, it’s all about knowing how to find the good companies and using an experienced investment manager like TIME to help build your clients’ AIM IHT portfolios is usually a great place to start.
As an AIM IHT portfolio one of the overriding criteria is Business Relief qualification, to enable investors to achieve Inheritance Tax exemption after just two years.
Q: Understood, so what are the other sets of criteria you look out for during the initial investment selection? As an AIM IHT portfolio one of the overarching criteria is Business Relief qualification, to enable investors to achieve Inheritance Tax exemption after just two years. Secondly, we won’t invest in companies that are pre-profit as it’s too early-stage for us. I’m not saying you shouldn’t invest in those but for the service we provide, this type of company is far too speculative. We require companies to be sustainably profitable and north of the £100 million cap, so that’s already a couple of very prescriptive areas for us.
Another great reason for having a well thought out system to apply to your investment process is that it ensures you can't 'style drift' as a fund manager.
Any views or opinions expressed are solely those of the author and do not necessarily represent those of TIME Investments. The information contained in this article 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. Any favourable tax treatment, such as Business Relief, is subject to government legislation and as such may change.
Important information
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By Billy Brown, Strategic Partnership Director, Triple Point
usiness Relief (BR), formerly known as Business Property Relief, is a tax relief that was introduced in the 1976 Finance Act. The intention behind it was clear: when the owner of a family business dies, their beneficiaries shouldn’t be left facing an Inheritance Tax (IHT) bill that would force them to sell or break up the business to cover the IHT liability. Business Relief was a valuable way of ensuring that small, family-owned businesses stayed in the hands of those families, taking the value of the business itself outside of the deceased’s taxable estate. Almost 50 years later, and Business Relief has come a long way. Over time, the rules relating to which companies can qualify for Business Relief have evolved. It’s no longer a relief applied solely to family-run businesses. In fact, today, many private limited companies, limited liability partnerships and sole trader businesses – provided they are actively trading businesses – can qualify. As a consequence, for investors with a significant IHT liability on the value of their estate, investing in Business Relief-qualifying companies presents a significant estate planning opportunity.
If a client owns shares in a company – or portfolio of companies that qualifies for Business Relief, those shares become fully exempt from IHT after a holding period of just two years, provided the shares are still held at the time of death. That’s a much shorter timeframe than using trusts or gifting away large sums to family, as both usually take seven years before achieving 100% IHT exemption. The added benefit for clients using Business Relief investments to mitigate IHT is that their money is invested, so it can continue to grow. It also means the sum invested remains in the client’s control throughout their lifetime, before being passed on free from IHT upon their death.
The added benefit for clients using Business Relief investments to mitigate IHT is that their money is invested, so it can continue to grow.
Where does Business Relief come in for clients?
5 biggest myths surrounding Business Relief and IHT
False. Headline figures from HMRC this year showed IHT receipts were up by £1 billion in the months between April 2022 and March 2023 compared to the same period last year. This follows an upward trend of record-breaking intakes from HMRC in recent years. With the nil-rate band unchanged at £325,000 since 2009, and not expected to be reviewed until April 2028, more families are getting caught in the IHT net.
IHT planning is only for the very wealthy
Myth 1
Since 2015, homeowners have been eligible for the ‘residence nil-rate band’, on top of their nil-rate band. This is an additional tax relief worth up to £175,000 provided the family home is passed on to the deceased’s children or grandchildren. Under IHT legislation, spouses and civil partners can inherit their other half’s share of an estate IHT tax-free, so their nil rate band does not need to be used up. The additional main residence nil-rate band can also be passed on. Theoretically, this means that a married couple can arrange their financial affairs to ensure that when they both die, £1 million of their combined estate is free from IHT. So, while there is some truth to this statement, in reality, not everyone will be able to claim the allowance, and there are many hurdles to clear in order for families to benefit fully. First, to avoid using up the nil-rate band of the first partner, the entire estate must be left to the surviving spouse. Also, in cases where the estate exceeds £2 million, the residence nil-rate band that can be claimed will be reduced by a rate of £1 for every £2 over that £2 million amount. As a result, larger estates may not benefit from the allowance at all.
Newer IHT allowances mean everyone can pass on £1 million completely IHT-free
Myth 2
This common misconception has arisen out of one of the key benefits of using Business Relief investments with clients – namely that the investment will qualify for Business Relief after being held for just two years, provided it is still held upon death. Certainly, a two-year timeframe for full IHT exemption is much more preferable to the seven-year wait that is required for trusts and gifting. But advisers should also consider Business Relief-qualifying investments as investments in their own right, capable of delivering capital growth and a consistent income for the full life cycle of the investment. Investments that qualify for Business Relief can help give clients at any age – even those with complex estate planning needs – a much-needed element of control in later life. It also means that similar control and IHT exemption can be handed down to their beneficiaries. Once the invested has passed the two-year qualification period when the client dies, then whoever inherits the investment – it could be a spouse/civil partner, a descendant or even a friend – is entitled to the same IHT relief from the investment for as long as they choose to keep their BR-qualifying shares. The shares are 100% exempt from IHT straight away and the person who receives these shares doesn’t need to wait two years.
Business Relief investments are just for older clients
Myth 3
Of course, IHT isn’t the only worry facing clients, as the increasing cost of later-life care is also a serious concern. New research from UK Care Guide suggests the average annual cost of a self-funded care home stay now stands at £45,897, or £882 per week, with the cost of care homes in cities around the UK rising by an average of 11% in 2023. And for those who need to be placed in a nursing home – receiving round-the-clock care – the costs are even greater. Average UK nursing home costs are around £56,056 annually, which works out at £1,078 a week. But with a Business Relief-qualifying investment, the shares remain in the name of the client throughout their lifetime. As a result, they can choose to sell some or all of the investment should they need to (although any money withdrawn will no longer be exempt from IHT). Even so, it’s important for advisers to determine how liquid such investments are. For example, with the Triple Point Estate Planning Service, after a withdrawal is requested, it aims to provide the required funds within 20 working days and has been returning funds at an average rate of eight working days over the last year. Business Relief is an excellent way to carry out estate planning without clients feeling anxious about losing access to their wealth during their lifetime.
Later life clients can’t afford to have their wealth tied up in investments
Myth 4
Business Relief is a well-established tax relief that has been helping thousands of investors to achieve IHT exemption on the value of their investments for almost 50 years. Moreover, an investment in Business Relief-qualifying companies is relatively easy for clients to understand. The Triple Point Estate Planning Service, for example, puts investor money to work through specialist businesses that meet the criteria for Business Relief and arrange funding for both public sector and private sector companies. As a result, it is helping families to claim IHT relief on their wealth, while investing in ways to unlock the UK’s economic growth potential and improve society. Of course, all investments carry an element of risk, and investing in BR-qualifying companies is no exception, which is why estate planning should always involve a professional financial planner.
Business Relief investments are too complex for later-life clients
Myth 5
triplepoint.co.uk contact@triplepoint.co.uk
Strategic Partnership Director, Triple Point
billy brown
At Triple Point, we see Business Relief playing a critical role in estate planning conversations, particularly among clients with larger IHT liabilities. We offer a range of estate planning support for advisers, including CPD-accredited tax planning webinars, digital tools and examples of suitability reports for clients.
1 https://ukcareguide.co.uk/rise-in-care-home-costs/ 2 https://lottie.org/fees-funding/care-home-costs/
Notes
Triple Point does not provide investment or tax advice, and information in this promotion should not be construed as such. 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 financial promotion has been issued by Triple Point Administration LLP which is authorised and regulated by the Financial Conduct Authority no. 618187
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By Jessica Franks, Head of Investment Products, Octopus Investments
icture a client named Clara. She’s in her mid-seventies. Clara is a widow and she’s lived in the same house for most of her life. She’s reached out to you to discuss her estate. Inheritance tax wasn’t something she’d ever thought would affect her. But almost inconceivably, her home is now worth many multiples of what she and her late husband paid for it. And while her assets have soared to ever higher values, the allowances available for an estate haven’t budged in that time. The nil rate band has been frozen at £325,000 since 2009. The residence nil rate band is set at £175,000. Neither is likely to increase any time soon against a backdrop of high inflation. So, unsurprisingly, Clara’s estate now faces an inheritance tax liability. She doesn’t know what her options are, or even where to start. And here’s the thing – Clara isn’t alone.
The widening inheritance tax net
Inheritance tax receipts have been growing at a remarkable rate, by almost £1 billion a year. This means more families will be dragged into the net, and those families already affected can expect more significant liabilities to plan for. We also need to consider the broader picture of inheritance tax. This is an area families find complex and often lack a good understanding in. There are plenty of myths that persist. It’s not uncommon for clients to assume the only way to plan for inheritance tax is to make gifts, or for clients to believe you can gift the family home and continue to live in it and escape inheritance tax. There is an urgent need that financial advisers can address here and help families pass wealth to the next generation. In doing so, you can also unlock a growth opportunity for your business.
Inheritance tax receipts have been growing at a remarkable rate, by almost £1 billion a year.
webinar
Growing through estate planning
To make the most of the growth opportunity, and to deliver good outcomes for clients, tune in to 'Growing through estate planning' on 26 July at 10am. This webinar will cover the inheritance tax landscape and why it deserves attention now. Special guest, Dave Seager Consulting Adviser to SIFA Professional, will talk through how advisers can build and maintain professional connections when it comes to estate planning. Also joining is a panel of financial advisers to discuss how they approach estate planning, the challenges they have faced, and how they have overcome them.
july
26
Register now
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.
Key risks
Our 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. Investors should read the product brochure before deciding to invest; this can be found at octopusinvestments.com. Personal opinions may change and should not be seen as advice or recommendation. 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. We record telephone calls. Issued: June 2023. CAM013134.
octopusinvestments.com support@octopusinvestments.com
Head of Investment Products, Octopus Investments
Jessica franks
1 Source: HM Revenue & Customs, April 2023
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By Nick Priest, Partner and Head of Strategic Partnerships, Downing
t is no secret that health and social care in the UK is under an enormous amount of pressure. As a standalone sector, social care operates very differently from the health care that individuals are provided by the NHS, which is free at the point of need. As a service, it covers a vast amount of the population and provides practical support to enable enhanced independent living for those who need more help. Examples include elderly care, specialist care and specialist educational needs. The system for adult social care is currently means tested and therefore the onus often falls on the individual or family members to pay for the services provided, with costs often spiralling. There are several socio-economic drivers fuelling disparities within the sector and creating unmet demands. The government recognises the pressures on the system and has recently announced a ten-year vision to overhaul the delivery of adult social care in the UK. However, it was announced in the most recent Autumn Budget that the specific social care reforms set out will be delayed a further two years until October 2025. The reality is that the sheer gravity of the shortfall in funding means there is likely to be a gap in provision for the foreseeable future which is increasingly being occupied by private capital. Given the needs-based nature of the sector and the current funding gap, investment into UK social care therefore represents a compelling long-term growth opportunity. Downing has been an active investor in this area for over a decade and provides investors access to the sector through its Downing Estate Planning Service (DEPS). In this article, Nick Priest, Partner at Downing, takes a closer look at some of the trends transforming the landscape and analyses how selecting a specialist investment manager with deep sector expertise can produce a sustainable return on investment and provide excellent portfolio diversification.
The sector is underpinned by powerful demographic growth trends. The UK’s rapidly ageing population is driving a growing need for high-quality elderly residential care homes. Meanwhile, as Britain’s population is ageing, so too is its existing stock of elderly residential care properties. Indeed, much of the market is in desperate need of replacing – or at the very least upgrading. Yet, echoing the wider housing sector, the current rate of new build development in elderly residential care homes is falling short. This presents a profound challenge and highlights the necessity for private capital to alleviate the mismatch between supply and demand across the sector. In addition, further demographic drivers have identified a growing demand from an older generation holding significant wealth and their willingness to pay private for good quality healthcare, given the lack of adequate available services.
An ageing demographic and lack of residential elderly care properties
The trends transforming the social care sector
Against stiff economic headwinds, health and social care’s lower cyclicality and defensive characteristics continues to demonstrate its ability to withstand market volatility. Given the needs-based nature of the sector, it clearly benefits from long-term thematic trends that aren’t directly influenced by market swings. Therefore, investors are increasingly recognising the role of private capital in delivering positive social impact through high-quality care in underserved markets, while producing sustainable returns.
Health and social care: a hedge against market volatility
The government has signalled it is putting its weight behind reform with the announcement of a Health and Social Care Levy in September 2021. Prime Minister Rishi Sunak has since gone on to pledge a grander commitment in his opening 2023 speech, stating that plans were in motion for an “overhaul of the sector, including specific measures around social care.” He also underlined that moving people, where needed, into community-based care was a priority.
Focused government support
ESG drivers continue to attract investment into social care given the societal benefits on offer and a growing investor appetite to diversify into these types of investments. Moreover, there is a growing consensus that the sector is poised to benefit further from investors primarily focusing on the ‘E’ (environmental) of ESG, but are now placing a much bigger focus on the ‘S’ (social).
Attractive ESG attributes of the sector
Investment into social care has seen an upward spike of capital inflows in recent years from larger institutional funds. Retail investors are also able to access the sector by selecting a specialist investment manager with deep sector knowledge and expertise, all while benefiting from the tax-advantages available through Business Relief (BR) qualifying investments. This is where Downing comes in. One of Downing’s key offerings, DEPS, enables clients to invest in BR companies that will provide them with full inheritance tax relief on their investment after two years. Through this service, Downing aims to preserve capital and deliver investors a steady return through income generation and capital appreciation across the asset-backed businesses it has interest in. Downing predominantly focuses its trading activities into businesses such as care homes, specialist living and specialist educational needs.
Accessing the social care sector through a tax-advantaged investment product
Retail investors are able to access the sector by selecting a specialist investment manager with deep sector knowledge and expertise, all while benefiting from the tax-advantages available through Business Relief (BR) qualifying investments.
As a responsible investment manager, Downing partners with highly experienced management teams in the sector who have a strong understanding of local market dynamics and the requisite expertise to operate high-quality assets. With multiple exits to date and a current portfolio that continues to perform ahead of expectations, DEPS continues to demonstrate social care as a worthwhile investment opportunity. Reach out today to hear more about the service and how the team is able to generate long-term sustainable returns with strong downside protection, while creating a positive social impact.
www.downing.co.uk sales@downing.co.uk
Partner and Head of Strategic Partnerships Downing
nick priest
1,320 beds funded across 21 care homes
48 beds funded for specialist residential care to high-acuity residents
Construction of schools for children with specialist social, mental and emotional needs
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By Joseph Cornwall, Investment Manager, Puma Investments
he last couple of years has certainly been interesting for investor’s portfolios which have often found themselves at the mercy of ongoing macroeconomic pressures and geopolitical tensions. Joseph Cornwall, an investment manager from Puma Investments, explores the importance of portfolio diversification and the role of IPOs within the marketplace.
What is the Alternative Investment Market?
The AIM market is a sub-market of the London Stock Exchange (LSE) for smaller companies looking to scale and trade their shares publicly. Often called London’s junior market, it was established in 1995 and replaced the former Unlisted Securities Market (USM). It was first introduced to help growth companies who could not meet the stringent requirements needed to float on LSE’s main market or afford the associated costs. For example, there is no minimum shares which a company must cede to public investors nor does the company have to demonstrate a market value of at least £700,000, unlike what is required on the main listing market. With its focus on entrepreneurial enterprises across various sectors, the AIM market has gained prominence as a hub of innovation and provides investors with potential for high returns.
The importance of diversifying AIM portfolios
Let’s start by looking at the stark difference of opinion within AIM service providers regarding the appropriate level of diversification. When it comes to the number of holdings within an AIM portfolio, there can be a great deal of variation out in the market with some services content with holding 20-25 companies and others holding more. Our stated range is around 30-40 companies and our portfolio is currently sitting towards the higher end of this. Broader diversification gives us the opportunity to focus on our best ideas whilst also acknowledging that smaller companies are inherently exposed to higher risk profiles. These risks stem from factors such as a narrower product set, higher customer concentration, management who are intrinsically linked to the business, as well as less efficient markets for financing during times of market stress. All of these are important reasons why we need to reduce the risk of point failure within the portfolio. When you compare it to the Main Market, AIM has large weightings to cyclical sectors such as consumer discretionary and industrials, and low weightings to more defensive sectors like consumer staples and utilities. We think it’s important to recognise the cyclicality that exists in AIM and prudence is required to avoid replicating that cyclicality. Therefore, we do not manage the portfolio in relation to index weights, preferring a bottom-up approach that focuses on individual stocks where growth is not solely reliant upon the business cycle. Through stock selection we are attempting to provide an investment approach that works across market conditions. Ultimately, we attempt to reduce risk by trying to find financially robust businesses with recurring revenues and strong cash flows run by astute management teams. Along with above average returns on capital to reinvest their cash flows to drive growth. We then again reduce our perception of investment risk by investing in a greater number of those holdings in the event that some of the stocks do not perform in line with expectations.
Ultimately, we attempt to reduce risk by trying to find financially robust businesses with recurring revenues and strong cash flows run by astute management teams.
An IPO is an initial public offering. IPOs occur when a privately held company transitions into a publicly traded entity by offering its shares for sale on a stock exchange.
What is an IPO?
UK equity funds have had 25 consecutive months of outflows, with another £612m outflow from UK equity funds in June, according to Calastone. As these funds are the main supporters of IPOs on the UK listed markets there continues to be a lull in IPO activity with the appetite from funds remaining low due to insufficient dry powder. 2022 proved to be the worst year for money raising since 2003 for AIM and 2023 is at a similar run-rate. In terms of the number of IPOs we remain at record lows since AIM was launched in 1995. Given the risk profile of AIM service clients we typically wait for a reporting cycle post-IPO before we invest in a company, although we will meet the company at IPO. Setting market expectations appropriately and communicating effectively with the markets has been a stumbling block which more recent listings have faced, particularly those companies which listed in 2021. The lessons are there to be learned by those companies looking to join the market. Appointing the right NOMAD (Nominated Adviser), which is mandatory for AIM stocks, and having board members with experience of public markets are ways to mitigate these risks. These are additional criteria we look for, amongst others, when we are assessing companies that are coming to market. Looking longer term, we do need a vibrant market on AIM to provide new ideas for us in the coming years. The state of the IPO market therefore remains a concern for us, however, we do expect IPOs to return when UK equity fund flows stabilise.
The role of IPOs in the AIM market and the current landscape
pumainvestments.co.uk advisersupport@ pumainvestments.co.uk
joseph cornwall
Investment Manager Puma Investments
Calastone Fund Flow Index - June 2023 www.calastone.com/insights/investors-looked-for-safe-havens-in-may-as-economic-threats-intensified
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By John Fearon, Head of Third Party Relations, Stellar Asset Management
ommercial forestry is arguably one of the most well-hidden investment gems in the tax-efficient space. Across the wider marketplace, it’s been no secret that this is a lucrative asset-class for the patient investor. Pension funds, family offices, endowment funds and even the Church of England have been investing there for years. The world in which we live is full of geopolitical tensions and economic volatility, yet forestry continues to demonstrate its value as a portfolio diversifier, a hedge against inflation and a long-term accretive asset class. Coupled with that are extraordinary tax advantages: Business Relief qualification (IHT); income tax and capital gains tax exempt – so investors thinking about their estate-planning would therefore be well advised to consider a specialist provider placing investment into this specialist sector.
Why commercial forestry and how does it work?
If you invest in commercial forests, then you are investing with a long-term view. The investment return comes primarily from the physical tree growth – and these trees take a long time to grow. However, actual growth is supplemented by inflation linked returns, global demand and, post Russia-Ukraine, and an increasing appetite for commodity "security." In addition, associated benefits are often overlooked: land price inflation, carbon credits (it is estimated that the voluntary carbon market will have to grow 15-fold by 2030 and 100-fold by 2050 if we are to comply with the mandates set out in the 2015 Paris Agreement), auxiliary assets/services embedded in the plantation site (such as Christmas tree plantations, quarrying, re-wilding, biomass and leisure), all of which contribute to overall performance. Typically, a diversity of assets would favour investment in a cross section of plantations at various stages of development. However, Stellar has always been valuation sensitive – not buying for the sake of it, looking instead for select, attractively valued, typically off-market opportunities identified through their extensive forestry network and specialist forestry partners. As such they have tended to be more bottom up, single asset focused and prepared to use its experience to invest in “new plant” and “virgin” opportunities as well as mature ones. This strategy can result in a more concentrated, convicted asset blend for their clients but can provide the potential for improved long-term returns. This strategy is now being expanded with the proposed launch of a diversified Forestry Fund. The Fund will assimilate Stellar’s current forestry holdings and blend with a broader base of forestry assets at various stages of maturity, including new planting opportunities. The fund will enable existing and new investors the opportunity to diversify their portfolios around a common model that will ensure returns are generated regularly through harvesting activities.
The tangible growth assets driving market growth
Against turbulent economic headwinds, many investors are turning to tangible assets that can remain risk resilient in the face of inflation and geopolitical upheaval, all while providing a strong historic return profile. This has recently been validated by the 2022 Tilhill Forestry report, the most comprehensive sector review on the market. Headline statistics to come out of the report: Interestingly, an increasing demand for timber assets driven by net-zero ambitions continues to make an impact on the sector and this has contributed to rising prices in a market characterised by fewer, smaller, but higher value sales in 2022. Scotland is currently “spearheading the charge for the economic forestry” with an 84% share of UK commercial forestry. Further analysis from IBISWorld has reported that their Timber Price Index increased by c.35% in 2022 and is forecasted to increase by a further c10% throughout 2023. This is testament to the current strength of the forestry market in the UK. This story of market growth has also been witnessed within the Stellar Business IHT Service and Stellar Growth IHT Service that have benefits for profitable exits, the remaining forestry assets anticipated to do the same.
ESG drivers
The widespread incorporation of environmental, social and governance (ESG) criteria into the investment process has continued on an upward swing in recent years, with many fund managers now integrating ESG considerations into their decision-making frameworks. Commercial forestry inherently lends itself to ESG considerations with many investors in the sector exposed to a range of ESG factors. One of the most conspicuous benefits of forestry management is the role it has to play in offsetting carbon emissions in the fight to meet net-zero initiatives. Forestry and woodland naturally absorbs and stores carbon which has been released into the atmosphere, and is one of the few proven methods to naturally store large amounts of carbon. ESG factors within the industry need to be considered as a part of a holistic approach in order to ensure strong environmental stewardship. There are various ways to achieve this but generally certification with recognised industry bodies is one tried and tested method to ensure the proper audit of operations, as well as compliance with sustainability standards.
A tax-efficient investment
Investing in UK commercial forestry can offer stable and predictable returns, backed by freehold or long leasehold interests, and auxiliary benefits. Commercial forestry is not correlated to other asset classes making it a perfect portfolio diversifier - it exhibits low NAV volatility, as well as offering a good opportunity to generate long term capital growth that is ESG friendly. Commercial forestry is accessible through two of Stellar Asset Management’s competitively costed core BR offerings: Stellar ITS IHT Service and Stellar Growth IHT Service.
"Together with our excellent forestry management partners we have a long and successful track record of investing in forestry. We buy off market to maximise the opportunity, using grants and other auxiliary embedded benefits to underpin initial costs. Along with a plethora of other benefits and ESG-aligned values, we are recognised as "under the radar" forestry investors worth considering."
Link to flyer/intro doc
Increase in transactions relating to land suitable for planting rose by 23% over 2022 Average cost per plantable hectare up 50% over 2022 Average value of a stocked hectare increased 46% over 2022
www.stellar-am.com enquiries@stellar-am.com
Head of Third Party Relations, Stellar Asset Management
john fearon
Diversifying through SME finance: reducing risk in your Business Relief portfolio
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By Jon Prescott, Partner, Praetura Investments
ou’ll often hear from advisers and investment managers on how important it is to diversify investment portfolios for clients. Serving beyond its use as a standard buzzword, diversification is a fundamental prerequisite that lies at the core of balancing risk/reward within an investment portfolio. By diversifying, investors will spread investments across a variety of asset classes and sectors to help mitigate downside risk should one particular sector or asset class not provide the expected return in times of market volatility or uncertainty. This also means that investors are able to capture the broader benefits that come with investing in a range of opportunities to generate long-term performance within portfolios. Business Relief (BR) qualifying investments are no exception to this rule. Investors should be given the opportunity to increase diversification in their portfolios, whilst being offered the opportunity to get ahead with estate-planning. With an abundance of offerings in the marketplace that all offer some level of diversification, investors can be left wondering where to start when selecting a manager. Targeted sector-specific diversification is often a unique selling point for providers, with many investing into renewable energy or property lending strategies. Other diversifiers include managers championing ESG practices or a blend of investment strategies to provide income and growth.
The Praetura Inheritance Tax Planning Service aims to offer diversification by leveraging the huge variety found in the UK SME Finance market through asset-backed loans. The service invests in UK based SME lending businesses, including Quay Street trading ltd, with strong track records to help investors mitigate their inheritance tax whilst enjoying predictable levels of growth. The service is able to offer unparalleled risk mitigation across thousands of loan agreements over a wide range of sectors. This helps tackle any single set of challenges any one sector faces whilst maximising capital preservation via secured lending agreements.
Simply put, it’s a loan given to businesses that utilises its assets as collateral to provide security. It’s a flexible solution widely used by SMEs to help support the upfront cost of certain purchases by spreading the repayments over time with smaller, regular payments, and can be crucial for many businesses needing to maintain working capital. It’s also an excellent strategy for a BR qualifying service as each loan facility includes a first loss capital position to act as a buffer against potential downside. The Praetura investment strategy provides predictable returns and significant asset coverage, the Praetura lending team has a strong track record with less than 0.1% capital write-offs across £820m of customer advances to date.
What are asset-backed loans?
Granular diversification
The diversification on offer is significant in comparison to other market offerings and access to the lending book provides exposure to over 3,250 agreements. Portfolios also benefit from investing into loans with differing criteria such as the number of arrangements, sectors, term to maturity, average loan size and yield. This level of granular diversification is just one of the reasons why investors can expect low levels of capital loss whilst enjoying a net target return of 4.5% per annum.
Powering 3,250+ SMEs across 80 different sectors
125 person lending team
Loan size ranging from £50k to £20m
Loan terms from 6 months to 3 years
0.1% capital write-off
Headline figures of the service
Sam McArthur, Partner, Puma Capital Group
Praetura offer one of the most exciting BR qualifying offers in the market. The UK SME finance helps fuel our economy and, through our seasoned lending team, we’re able to help harness that potential to help advisers meet their client’s estate planning goals. Our model combines tech-enhanced lending processes with industry experience to offer results that speak for themselves. I’ve seen few offerings that can combine this level of stability in liquidity options, capital preservation, diversification and target return.”
Partner Sam McArthur, who recently joined the team from Puma Capital Group to help build on their success to date, said: “Praetura offer one of the most exciting BR qualifying offers in the market. The UK SME finance helps fuel our economy and, through our seasoned lending team, we’re able to help harness that potential to help advisers meet their client’s estate planning goals. Our model combines tech-enhanced lending processes with industry experience to offer results that speak for themselves. I’ve seen few offerings that can combine this level of stability in liquidity options, capital preservation, diversification and target return.” “Last tax year, HMRC received a record-breaking £7.1bn in IHT receipts and this will only create greater demand for estate planning solutions such as BR qualifying investments. Advisers should be pushing managers to disclose in greater detail how client’s money is being invested to understand what tools best suit their needs.”
praeturainvestments.com jon.prescott@praetura.co.uk
Partner Praetura Investments
jon prescott
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Identify the main developments and news in the Business Relief market
Analyse some key topics of particular relevance to the BR sector
Outline some sectors and strategies that successful BR managers are leveraging
Recognise the various factors that will affect the Business Relief market in the coming months
Disclaimer
How did you do?
Focus on quality drives pandemic returns SEIS expanded to support Government’s focus on innovation and entrepreneurs Are hostile takeovers a danger to AIM investors and UK PLC? Focus on quality drives pandemic returns SEIS expanded to support Government’s focus on innovation and entrepreneurs Are hostile takeovers a danger to AIM investors and UK PLC?
Section text Section text Section text Section text Section text
The EIS universe today Consumer Duty: What it could mean for EIS investments EIS: The smart money goes north Find the gems: The art of identifying and investing in resillient businesses Three need-to-knows about knowledge-intensive-companies EIS: A tool in the net zero journey, despite renewables ban How the rise of healthtech is transforming our healthcare experience Going for growth with EIS EIS open offers jump by 24% Regulation 2023: It's more than just Consumer Duty EIS dealflow: Building pipelines for funding success Bionic Arms for Ukrainian soldiers Continuing professional development About Intelligent Partnership
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