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Industry Update | May 2024
business relief
Five reasons why now’s a good time to talk Business Relief with your clients
Octopus Investments
Triple Point
Five considerations when accessing unquoted BR investments
TIME Investments
A Business Relief (BR) case through the consumer duty lens
Intelligent Partnership
The Intelligent Partnership BR Benchmarking and Insights Survey
Zenzic Capital
Real Estate Investing: Whatever the Weather
Stellar Asset Management
Demystifying ESG - Making money and doing good?
Praetura Investments
The looming £5.5 trillion wealth transfer
Ingenious
Consumer Duty: what will be the outcome for Business Relief products?
All fund managers
The interview room
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Welcome
The BR universe today
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learning objectives
It’s been another record-breaking year for IHT receipts.
Business Relief remains a cornerstone of effective IHT planning, offering clients flexibility and control. It’s a vast marketplace with a large number of BR investment managers offering a wide range of objectives, investment strategies and risk profiles. This industry update helps you navigate the technical information and knowledge required, as well as provide valuable insights from prominent BR managers.
A solution that offers flexibility and control
The BR universe today Five reasons why now's a good time to talk Business Relief with your clients A BR case through the consumer duty lens Five considerations when accessing unquoted BR investments The Intelligent Partnership BR benchmarking and insights survey Real estate investing: whatever the weather Demystifying ESG - making money and doind good? The looming £5.5 trillion wealth transfer Consumer duty: what will be the outcome for Business Relief products? The interview room About Intelligent Partnership
Since our latest update, Inheritance Tax (IHT) receipts have continued to surge, with HMRC reporting an unprecedented £7.5bn collected between April 2023 and March 2024. With nil rate bands frozen until 2028, more individuals are at risk of falling into the IHT net in the coming years.
Currently, only 4% of estates are subject to inheritance tax (IHT). However, the Institute for Fiscal Studies (IFS) projects that by 2032–33, over 7% of deaths will result in IHT liability. This increase means that a larger number of individuals will be affected. By that time, the IFS predicts that one in eight people will owe inheritance tax either upon their own death or the death of their spouse or civil partner. Running parallel to this, the world is more uncertain than ever with the global macroeconomic and geopolitical environment continuing to present challenges for investor’s portfolios. Not to mention a cost-of-living crisis, inflation, high-interest rates… the list goes on. As a result, many clients may not fully grasp their IHT obligations, particularly in today’s challenging economic climate.
In this issue of the Business Relief (BR) industry update In this article, one managers talks you through the Five reasons why now’s a good time to talk Business Relief with your clients With the new Consumer Duty regulations now in effect and a hot topic on every adviser’s lips, we are pleased to share A BR case through the consumer duty lens, an article from the recently released fourth edition of ‘A Technical Guide to Business Relief. Many advisers are aware of Business Relief (BR) through AIM-listed investments, but what about the opportunities in the unquoted sector? One prominent manager takes a closer look in Five considerations when accessing unquoted BR investments Can real estate private credit strategies perform when real estate values are declining? Are they truly all-weather investment strategies? Find out in Real estate investing: whatever the weather In Demystifying ESG - Making money and doing good? One investment manager examines why undertaking a pragmatic, common-sense led approach when it comes to ESG investments can maximise shareholder value. With a reported £5.5 trillion set to be passed down by 2050 in the UK, and a global forecast of around $68 trillion moving to the next generation, understanding how to manage and protect wealth is becoming increasingly important. We take a look at different estate planning strategies in The looming £5.5 trillion wealth transfer Get the latest insights from key BR managers in The Interview Room: exploring the tax-advantaged landscape with industry providers Proving that it’s not just a ‘one and done’ exercise, this article navigates the more technical pointers to consider in Consumer Duty: what will be the outcome for Business Relief products?
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. And Business Relief-qualifying investments should be part of that conversation. As a quick reminder, Business Relief (BR) is an established relief from inheritance tax available for shares in qualifying trading companies. It’s 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 for clients.
- 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.
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Speed, access and control
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Inheritance Tax thresholds and interest rates – GOV.UK (www.gov.uk) https://ifamagazine.com/inheritance-tax-payments-forecast-to-hit-new-high/ The Great Wealth Transfer | The Private Office Source: Octopus Investments ‘Unlocking estate planning’ webinar, March 2020
By Octopus Investments
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 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.
Reason 1.
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.
Different solutions for different clients
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.
The ongoing great wealth transfer
Reason 3.
Five good reasons to consider BR
Reason 2.
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.
Consumer Duty and avoiding foreseeable harm
Reason 4.
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.
The current price of AIM-listed shares
Reason 5.
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?
What next?
Now you know the five reasons to talk to your clients about BR, you might want to take five minutes to have an initial discussion with your local Business Development Manager. You’ll also find a toolkit of client-friendly resources to help move your IHT conversations forward here. Our research has shown that 76% of advisers said advising on estate planning, which includes BR, has led them to discover new assets. IHT savings can be a brilliant way to articulate value and gain referrals.
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e are delighted to launch the highly-anticipated fourth edition of 'A Technical Guide to Business Relief. A must-have, educational resource for those considering their estate planning needs that is full of technical knowledge and key insights from thought leaders in the sector. TIME Investments has sponsored this guide from Intelligent Partnership since the inaugural guide in 2018 and it has proven to be popular with financial advisers and paraplanners alike. With the new Consumer Duty regulations now in effect and a hot topic on every adviser’s lips, we share an article from the guide that provides practical pointers for when it comes to making a BR recommendation to your client base.
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‘A Technical Guide to Business Relief’, Intelligent Partnership guide sponsored by TIME Investments
Evidencing your findings from the client fact-find, what they want to achieve, and the reason for your recommendations is more important than ever under the Consumer Duty. So, detail is key, including a clear audit trail of research and comparisons carried out to make the recommendation. For example, document what exactly you have checked with the investment manager in an up-to-date schedule, when checks were made, and where to locate the information from the investment manager provided to you on their Business Relief (BR) service. You must also ensure that your client fully understands why you have chosen a certain investment strategy for them. Clarity for the client and the regulator, demonstrating the tailoring of your advice to meet the clients’ specific needs and objectives, is critical. This is right at the heart of much of the regulator’s Consumer Duty thinking because, “Consumers can only be expected to take responsibility where firms’ communications enable them to understand their products and services, their features and risks, and the implications of any decisions they must make.” When it comes to BR, the income or capital required by the client to maintain their lifestyle for the rest of their life, a fundamentally important goal, will form part of your advice. That is why getting to the bottom of what, why and how much is something you will want to accurately record.
Making the recommendation
Your engagement with the client is now subject to enhanced scrutiny and when interacting directly with a customer you need to consider their particular needs, including how best to coach them through the choices you are recommending that they make. This is likely to include regular check-ins to confirm understanding and opportunities for the client to ask questions and request additional support. That might be in the form of a telephone call, a written communication or website content. Do not set the threshold of understanding too high and start from broader areas such as the purpose of the product, possible alternatives, the risks associated with the product, and practicalities of actually proceeding with it. And watch out for signs of vulnerability and circumstances that could lead to vulnerability such as financial difficulty, or developing health issues. In terms of the suitability report, if unnecessary detail is provided it can lead to information overload and lack of reader engagement. While it is not always possible for suitability reports to be as short and concise as would be optimal, one solution is to add a summary up front covering the key aspects, if you do not already do so. The client file will also need to include documentation to show what foreseeable risks of harm have been identified and how they have been mitigated or understood by the client if they are unavoidable. Client conversations may be recorded to evidence their clear understanding of what they are entering into, how the product works, the risks and impacts of varying scenarios. Listen and take notes of client discussions and verify with them that they understood them correctly and that they understood you fully. Without full understanding, clients could make the wrong decision, leading to a bad outcome, including purchasing an unsuitable product or service. For example, failure to understand the risks associated with volatility within a BR qualifying AIM portfolio could lead to disappointing consequences if the client needs to access their money when the market is low.
Optimising client engagement and understanding
If you are concerned about your client’s level of understanding, it may be worth slowing down the process by introducing positive friction to the sales process, perhaps by using an online service that requires clients to watch a video on the risks, before they invest. This would be intended to reinforce information already given and to assist the client with making a properly informed and reasoned decision. This is permissible under the Consumer Duty as long as no unreasonable barriers are created for customers. With a BR case, it is advisable to have an accurate Inheritance Tax calculation on file, as well as a calculation to demonstrate the projected impact of the advice. You also need to be very clear on the client's understanding of the risks in the client file, including a full discussion of attitude to risk, capacity for loss, and how your recommendation takes these things into account. If you are doing that by allocating a particular tranche of the portfolio to BR, you must be sure to include a narrative to explain what portion of the portfolio sufficient risk attitude and capacity for loss applies to and why.
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We are focused on backing the next generation of promising, fast-growth British businesses. In just the last year, our newest 14 investments have been associated with the creation of over 100 new jobs, distributed across the country, injecting fuel into the economy. Each investor in the fund gains exposure to a number of high-quality teams with innovative products, each harnessing the dynamism of Europe’s largest startup ecosystem to drive future investment returns.
Without full understanding, clients could make the wrong decision, leading to a bad outcome, including purchasing an unsuitable product.
Consumers can only be expected to take responsibility where firms’ communications enable them to understand their products and services, their features and risks, and the implications of any decisions they must make.
The four outcomes: consumer understanding
The FCA wants firms to support their customers by helping them make informed decisions about financial products and services.
The FCA wants customers to be given the information they need, at the right time, and presented in a way they can understand.
Firms must communicate information in a way which is clear, fair and not misleading and that equips customers to make decisions that are effective, timely and properly informed.
Firms must tailor communications taking into account the characteristics of the customers intended to receive the communication – including any characteristics of vulnerability, the complexity of products, the communication channel used, and the role of the firm.
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Firms should ask customers if they understand the information and have any further questions.
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Please click here to download your free copy of ‘A Technical Guide to Business Relief’
The information contained in this article does not constitute and should not be construed as constituting investment or tax advice by TIME Investments. Any views or opinions expressed are solely those of the author and do not necessarily represent those of TIME Investments. 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. Investors’ capital is at risk. TIME Investments is authorised and regulated by the Financial Conduct Authority.
Important information
ew data released by HMRC reveals Inheritance Tax (IHT) receipts have reached a record high, rising to £7.5 billion in the 2023/24 tax year, demonstrating a £400 million increase in comparison to the same period last year. This suggests that despite increased awareness among many clients, IHT is a financial planning issue that won’t be going away any time soon, so all types of estate planning should be considered, including investments that qualify for Business Relief (BR).
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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
Many advisers are aware of Business Relief (BR) through AIM-listed investments, but what about the opportunities in the unquoted sector?
Strategies in the unquoted BR sector vary, and can include renewable energy, property development, and private and public sector lending and leasing, to name a few. Each has their own unique characteristics, risk/return profile and liquidity considerations. It is therefore essential to understand the key asset allocations within these unquoted opportunities to avoid portfolio overexposure to one or two qualifying trades or sectors. This underlying diversification is important to help ensure returns are consistent, and that the company has enough liquidity to pay out income when required.
How diverse is the underlying portfolio?
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Job title Triple Point
NAME SURNAME
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.
By Triple Point
Introduced by the UK government in 1976, Business Relief (BR) aimed to ease the transfer of family businesses down generations without triggering costly IHT bills. Over the past five decades, the scope of BR has expanded, making it a crucial IHT relief for both family businesses and investors in BR-qualifying companies. Investments that qualify for BR can be made either in unquoted companies that meet the qualifying criteria, or in certain companies listed on the Alternative Investment Market (AIM). AIM, the junior market of the London Stock Exchange, is a market with great long-term growth potential, but AIM-listed shares can be volatile and are considered higher risk than those listed on the main market. When it comes to estate planning, many clients may find they prefer unquoted investments that are still BR-qualifying but may have less volatility than shares listed on AIM.
What is Business Relief?
unquoted br investments due diligence: key five considerations
Unquoted BR investments offer several benefits for estate planning clients beyond IHT exemption and retaining control over their wealth. It means they get to own an investment in a trading business that delivers returns that are uncorrelated to equity markets, and with a risk/return profile that suits their own personal objectives, managed by an experienced investment manager. It also means their money is being put to work in interesting and useful ways, perhaps providing capital to small or medium-sized enterprises, innovative start-ups, or unique projects in sectors like renewable energy, property development, and private and public sector lending and leasing. For advisers keen on guiding clients through the advantages of unquoted BR investments, we provide extensive support and resources. We offer customised client planning scenarios, host informative events and training sessions, and maintain accessible online portals. These resources are designed to enhance advisers' knowledge and simplify integrating unquoted BR investments into effective estate planning strategies. We’re happy to help.
One of the reasons clients may prefer unquoted BR options is because they don’t want their investment to experience the volatility of AIM. It’s therefore important to determine the target returns offered by the unquoted BR manager, and whether they have managed to achieve those returns over a consistent number of years. Some unquoted BR managers have been around for a significant amount of time, so it’s worth getting an understanding of whether they have managed to achieve consistent returns through full economic cycles as well as demonstrating resilience through major events, such as Covid, for example.
How consistent have the returns been?
One of the risks with investing into unquoted companies is the liquidity. Therefore, the manager’s track record of returning money to investors should be looked into, as liquidity will be a key consideration for some clients. It’s worth asking what their liquidity target is and, more importantly, what their liquidity track record has been. Clients should know at the outset how long the manager takes on average to deal with any withdrawal requests. It’s also worth remembering that BR cannot be guaranteed; it is only granted by HMRC on a case-by-case basis after the death of the investor. It’s therefore worth asking managers how their BR-qualifying companies are managed to achieve BR, and whether the provider knows of any instances where HMRC has challenged the IHT-exempt status of a deceased client’s estate. Finally, given their experience and track record of managing unquoted BR-qualifying companies what does the manager consider to be their source of competitive advantage?
What is the experience and track record of the manager?
Advisers should have a reasonable understanding of the governance structure of the investment manager e.g. what roles do the investment manager’s governance functions (Risk, Legal, Compliance) play in the design and running of the service? Do they have an Investment Committee? Can the manager describe how its trading activities are selected and monitored? Unquoted companies are harder to value, as the shares are not valued on an open market and they are not required to publicly disclose information on which valuations are based. Therefore, managers should be able to explain the methodology they use to value their book, as well as confirming whether those valuations are independently reviewed or verified. Non-Executive Directors (NEDs) can play a significant role in helping to ensure an underlying company is managed responsibility, while also giving independent oversight that the company is carrying out BR-qualifying trades. Where NEDs are in place, it is important to know their experience level and profile.
What corporate governance is in place?
With any estate planning investment, communication is essential. Does the manager make their investment team available to advisers via webinars or update sessions? And of course, the investment is just the first undertaking. At some point the client will pass away, and it becomes the responsibility of their executor to ensure the investment and its proceeds are managed according to the client’s wishes. Managers should have experience of interacting with vulnerable clients and people who have recently been bereaved. It’s essential the manager understands the customer service-related aspects of their role and is committed to delivering the best outcomes at a particularly difficult time for those involved. All communications with bereaved families must be as clear, jargon-free and straightforward as possible, without being intrusive. This is why the best estate planning service providers will have dedicated teams available to help talk families and advisers through the next steps, and to answer any questions about the investment, claiming IHT exemption, or the probate process. In most instances, providers can release funds from the investment to pay an outstanding IHT bill to HMRC, so having the knowledge to facilitate this is essential.
Customer service
Some unquoted BR managers have been around for a significant amount of time, so it's worth getting an understanding of whether they have managed to achieve consistent returns through full economic cycles as well as demonstrating resilience through major events, such as Covid, for example.
To find out more, please visit our website
This article was originally published in FT Adviser on 4 January 2024 and has since been edited to reflect new data on 25 April 2024.
Therefore, if you are looking at unquoted BR investment options on behalf of clients, here are five key considerations that should form part of your due diligence process:
https://www.gov.uk/government…#inheritance-tax-iht
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BR Benchmarking and Insights Survey
n Autumn last year, Intelligent Partnership partnered with Research in Finance, a leading financial market research and consultancy, to undertake one of the largest provider benchmarking surveys on the tax advantaged market. With over 250 UK-based advisers taking part in the survey, we wanted to tap into what the financial planning community is really thinking when it comes to using Business Relief products. To gain a balanced overview, we targeted a mix of advisers who are familiar with the tax-advantaged sector, as well as advisers who only write occasional business or perhaps avoid it all together. This was done with the intention to help us gauge a broader perspective on specific reasons why advisers may or may not consider these types of investments. On top of this, we wanted to ascertain provider awareness and understand which companies are leading the market when it comes to the customer service journey and really drill down into the specifics.
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Quantify awareness, demand and uptake across different segments Identify drivers for recommending and excluding different product types Uncover which providers are most widely used for business relief products, as well as the perceptions of these firms Assess the forms of help that would be most beneficial to advisers when recommending tax-advantaged products
We asked a series of question working to the following key objectives:
We were delighted not only with the uptake of the survey but also with the results. Even though Business Relief products are viewed as high-risk, our survey revealed there is a robust 80% recommendation confidence among users. In this article, we are pleased to share some of the key results:
For which of the following planning purposes have you recommended Business Relief products? Business Relief users (164)
When you are recommending Business Relief products as an estate planning solution for your clients, what would you say is the biggest challenge? Business Relief product users (164)
When selecting a provider for Business Relief products as an estate planning solution for your clients, how important are each of the following? Business Relief product users (164)
When recommending Business Relief products, how many providers do you typically diversify an investment across? Business Relief product users (164)
Which of the following would you like help with when it comes to recommending Business Relief products? Total (250), Business Relief product users (164), Business Relief product non-users (86)
Which two of the following would you be most likely to participate in to get help on these areas? Those that selected help when recommending business relief products (221), Business Relief product users (153), Business relief product non-users (68)
THE MAJORITY OF BUSINESS RELIEF USERS RECOMMEND THESE PRODUCTS AS A RESULT OF THEIR CLIENTS WANTING TO UNDERTAKE ESTATE PLANNING WITHOUT LOSING ACCESS TO THEIR WEALTH
RISK-RELATED FACTORS STAND OUT AS THE BIGGEST OBSTACLE WHEN IT COMES TO RECOMMENDING BUSINESS RELIEF PRODUCTS AS AN ESTATE PLANNING SOLUTION, FOLLOWED BY A LACK OF CLIENT UNDERSTANDING AND FEES
THE TRACK RECORD OF ACHIEVING BUSINESS RELIEF QUALIFICATION STANDS OUT AS THE MOST IMPORTANT FEATURE FOR USERS WHEN IT COMES TO SELECTING A PROVIDER; DIVERSIFICATION OF THE INVESTMENT AND PROVIDING LIQUIDITY ALSO SCORE HIGHLY AS “VERY IMPORTANT” DRIVERS
ADVISERS USE AROUND 3 PROVIDERS BUSINESS RELIEF PRODUCTS ONAVERAGE; OCTOPUS INVESTMENTS IS THE MOST POPULAR PROVIDER
BOTH USERS AND NON-USERS OF BUSINESS RELIEF PRODUCTS SEEKASSISTANCE IN COMPARING IHT SOLUTIONS, WHILE USERS REQUIRE AGREATER UNDERSTANDING OF THE UNDERLYING INVESTMENT STRATEGIES
ONLINE WEBINARS ARE THE PREFERRED METHOD FOR ADVISERS SEEKING ASSISTANCE WITH BUSINESS RELIEF PRODUCT RECOMMENDATIONS, THIS METHOD IS PARTICULARLY POPULAR AMONGST NON-USERS
If you would like to see the full results from the survey along with the provider benchmarking stats then please feel free to reach out to Francesca Eastwood, Programme Director - francesca@intelligent-partnership.com
uch of the commentary assumes that commercial real estate, particularly office space, experiences across-the-board value decreases. While this viewpoint oversimplifies matters, real estate credit strategies can and do perform well even in challenging market conditions. For those with an opportunistic mindset, performance might even surpass that of the zero-interest rate period ('ZIRP') when asset values reached all-time highs. So, how does this work?
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Challenges of fluctuating real estate valuations
Can real estate private credit strategies perform when real estate values are declining? Are they truly all-weather investment strategies?
Lenders must adapt to lending in the context of reduced values. However, reduced values pose less of a problem if they are known before the loan is issued. It becomes much more challenging when values are volatile and change mid-credit. This is less of a 'new credit' issue and more of a problem for old credit, issued when values were high but now must be repaid when values are lower. In many sectors of European real estate, we believe a significant part of the value correction has already occurred, and signs of recovery are becoming apparent to many real estate experts.
By Thomas Lloyd-Jones, Chief Investment Officer, Zenzic Capital
The impact of interest rate changes
The recent interest rate hiking cycle has led to a significant repricing of credit in favour of lenders, often by as much as 500 basis points within a mere 12 months. This shift is of paramount importance, even if it has become somewhat of a familiar notion. During the ZIRP era, achieving high single-digit or double-digit returns for senior secured real estate credit with moderate loan-to-value ratios, supported by high-quality assets and responsible borrowers, was challenging. Now, pricing based on spreads over reference rates, coupled with fees, is likely to yield such returns. From a distance, one might marvel at how lenders can now earn 500 basis points more for essentially the same service. However, it's the last five words where the true nature of the situation lies. Real estate capital markets have undergone significant changes in the past 12 months, not just in terms of pricing. The double-edged sword of the rate cycle has brought about value declines or stagnation, albeit not uniformly across all sectors. Despite theoretical arguments to the contrary, in practice, capitalisation rates* tend to increase with rising interest rates, albeit not necessarily in lockstep. This, coupled with the rising cost of debt capital that fuels much of the sector, typically leads to decreases in real estate asset prices unless there are substantial increases in real estate net operating income to offset them.
The larger concern for lenders, in our opinion, is not valuation but rather deployment. Will borrowers seek credit if it is not accretive, i.e., if its cost exceeds the equity yield? We believe demand for real estate credit is increasing despite its rising cost, reminiscent of the economic concept of Giffen Goods. Liquidity is dwindling from real estate capital markets concurrently with debt maturities, compelling borrowers to seek new capital. Banks, still the dominant providers of real estate capital in Europe, are either risk-averse or constrained by regulatory capital charges from lending. As a result, real estate owners and acquirers are left with the task of raising debt from a select group of non-bank credit providers amidst elevated pricing, or finding equity, which is easier said than done.
The demand for real estate credit is increasing despite its rising cost
This state of affairs is unlikely to persist indefinitely, and already, there are indications of interest rate cuts in the foreseeable future. Nonetheless, the current state of capital markets offers lenders an opportunity that has been absent for nearly 15 years. Even in the face of uncertain asset values, lenders who can properly underwrite assets and sectors should be able to achieve enhanced risk-adjusted returns in the short term, demonstrating that real estate credit is indeed an all-weather investment strategy.
The current opportunity for lenders
The cap rate is an assessment of the yield of a property over one year. It is calculated by dividing a property’s net operating income by its asset value.
What are capitalisation rates?
In the below chart, we map out how we are able to adjust opportunistically across the business cycle regardless of the macroeconomic environment to find outperformance within our portfolios.
zenziccapital.com | zenziceps.com info@zenziccapital.com
Chief Investment Officer, Zenzic Capital
Thomas Lloyd-Jones
nfortunately, as time has passed, ‘what is ethical’ has become less clear and more complex. I like to analogise it with the story of Frankenstein, wherein Viktor Frankenstein has aspirations to achieve something great and morally good, but in the pursuit of his goal he creates a monster. There is a stark parallel here to the story of ESG; a concept borne of good intentions, that has become monstrified by overregulation and focuses on things that simply do not matter…or make money! Delivering value to our investors is always at the forefront of our minds. All this noise can encourage behaviour that is uneconomic and can damage the prospect returns of investee companies. We like go about things differently and take the path less trodden.
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By Jack Pedley, Assistant Fund Manager, Stellar Asset Management
In recent times, it has become increasingly popular for investors to use ESG criteria to evaluate the sustainability and ethical performance of companies to help make informed investment decisions…but does it make the investor money, or just help their social conscience? Jack Pedley, Assistant Fund Manager at Stellar Asset Management, examines why undertaking a pragmatic, common-sense led approach can maximise shareholder value.
When I talk about overregulation, that isn’t to say that regulation of ESG is bad. Moreso, that there is too much information to follow and competing voices in the market, all with differing opinions on what’s important. There are countless sets of ESG legislation, ratings agencies, third party advisors and specific sub-regulations for different ESG topics. Having so many voices encourages companies and investors alike to engage in box ticking exercises, rather than a targeted approach, which addresses the key and impactful ESG issues head on. As a result, businesses are being pressured into making decisions that aren’t economic. It’s also important to note that there is no absolute consensus on what is important in ESG, with each operator providing differing views, and some even disagreeing on whether certain practices are good or bad from an ESG perspective. It’s for this reason that we do not pigeonhole ourselves as an ESG fund, nor follow the crowd when it comes to ESG screening. When all of the guidance differs, who’s right? Considering ESG is something that is additive to our investment process, we believe it's important to take a simple and pragmatic approach, with focus areas on the key issues that can maximise value to our investors.
Too many cooks
Addressing key issues
‘We expect there to be a long term decarbonisation strategy in the UK’
Environmental
‘There is an equitable treatment of all stakeholders’
‘The company should be managed well and fairly’
‘We want to see that a company is improving every year’
These focus areas are backed by science and research, as well as the most important element; common-sense. The amount of carbon in the atmosphere is increasing, and global temperatures are rising. While the UK government is reducing funding for sustainability and has recently deferred the date for the internal combustion engine ban, we believe this will be a temporary measure and want our investee companies to keep a focus on carbon reduction. Those best placed to endure a low carbon economy will thrive in the long term. Social We ask simple questions; ‘does a business conduct safe and ethical workplace practices’, ‘what is it like to work for’ and ‘what are their products or services like to use’. The best places to work tend to outperform and satisfied customers are key to continued long-term sales. Governance Again, we ask simple questions; ‘are the right people in management’, and ‘are they appropriately remunerated’. Not only is it important to have people with the right background, but diversity is also key. For example, research shows a correlation between having over 30% female representation on a board and a positive and less volatile share price performance. Direction of Travel (DOT) Top performing companies are typically hyper competitive and look to outcompete their peers in all areas. ESG should be treated with the same push and strive for continual improvement.
We take a pragmatic, common-sense approach, which is inspired by a story from 2006. Disney CEO, Bob Iger, approached Pixar CEO, Steve Jobs, to discuss a potential deal. The two sat for hours listing every possible pro and con of the deal they could think of. The eventual list had 2 or 3 pros, and over 50 cons – it didn’t look likely anything would happen. Thankfully, Steve Jobs was able to take a step back and appreciate that a few solid pros are more powerful than dozens of cons. This common-sense approach led to one of the most successful large scale mergers of all time… and Apple hasn’t done too badly from it either! For each of our investee companies we list out the pros and cons (through SWOT analysis) from the perspective of the E, S, G and DOT factors. Considering all the information available to us, we hone in on the important issues noted above, as well as any business specific issues. From this base we take a step back and score the company. Each factor is scored out of 10 points, giving companies a maximum of 40 points total. Potential investee companies need to score at least 24 to qualify for investment, and must maintain this number once capital has been deployed. Investee companies that fall below this level are given 18 months notice to improve or we are forced to divest. By focusing on what’s important, not box ticking, we can engage with companies to implement changes that deliver real shareholder value and set them up for the long term. It’s critical however that these changes are phased in, so as not to disrupt the business operations. For sustainability to add value to investors, it should be done in a sustainable and economic way. We believe this framework can enhance the returns to our investors, all while doing something good.
Factoring this in our investment decisions
Considering ESG is something that is additive to our investment process, we believe it’s important to take a simple and pragmatic approach, with focus areas on the key issues that can maximise value to our investors.
www.stellar-am.com enquiries@stellar-am.com
Assistant Fund Manager Stellar Asset Management
jack pedley
n increasing number of people are facing the dual challenge of navigating the complexities of inheritance tax (IHT) whilst planning for the transfer of wealth to the next generation. With a reported £5.5 trillion set to be passed down by 2050 in the UK, and a global forecast of around $68 trillion moving to the next generation, understanding how to manage and protect wealth is becoming increasingly important. The scale of the impending wealth transfer makes IHT planning and strategic investment choices essential for those looking to safeguard their legacy and boost the prosperity of their beneficiaries.
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Clients can always simply ‘gift’ their assets away. Gifts between spouses or civil partners are free from IHT, and HMRC also allows an annual gifting allowance of £3,000 every year. Timing is key as you can give unlimited amounts away, but gifts typically take seven years to be completely inheritance tax free. IHT paid on gifts has increased by 153% since the 2010/11 tax year, to hit £256m in 2020/21, following the death of the donor within seven years of the gift being made. Of course, you also need to consider that once assets have been gifted, the donor loses control. If you need it back in an emergency, that’s often not an option.
Gifting
The above is a high-level overview of tax planning scenarios and may not account for all planning options available to clients. Seek independent tax advice before making any decisions. 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. Seek financial advice. The information above is meant for illustrative purposes only and should not be read as advice. Don't invest unless you're prepared to lose all the money you invest. This is a high-risk investment, and you are unlikely to be protected if something goes wrong. Please take two minutes to learn more: praeturainvestments.com/risk-summary
Risk factors
The prospect of an IHT bill looms large for a growing number of families in the wake of the government’s decision to freeze the nil-rate bands for IHT until 2028. The number of estates paying IHT jumped by 17 percent to 27,000 in 2020-21, from the previous tax year, and the total IHT take is forecast to raise almost £10bn a year by 2028-29. The rise of IHT is due largely to years of house price increases, rising inflation and tax freezes, which have elevated an increasing number of families that would not consider themselves to be wealthy above the threshold for IHT.
Understanding IHT
The transition of wealth from the ‘baby boomers’ to younger generations is poised to reshape the financial landscape. The shift extends beyond estate planning, presenting a unique set of opportunities and challenges for advisers. Aligning the values and preferences of Generation X (those born between 1965 and 1980) and millennials (those born between 1981 and 1996), who are often characterised by their lean towards sustainable and responsible investing, will be a prominent investment theme over the next decade. Preserving assets and the size of the wealth transfer will depend on the estate planning strategies employed by families in the coming years. Understanding the different options and selecting the best ones will be a challenging process. Some of the more popular routes include the themes outlined in the next section.
The impending wealth transfer
Life assurance does not reduce how much inheritance tax is liable, but it can be used to preserve assets by settling an inheritance tax bill.
Life assurance
Trusts can be used to make sure that assets are given to beneficiaries in a timely and controlled manner, with the potential to mitigate inheritance tax liabilities. People usually set up trusts as a way to make sure assets are maintained by families over generations. A significant advantage of using trusts is that they can be set up to align with a client’s wishes. There are several different types of trusts to meet different needs and it is therefore sensible to consult a financial adviser, tax adviser or solicitor when for advice that takes into account individual circumstances .
Trusts
Research by Deloitte has suggested that up to 90% of heirs change their adviser following a transfer of wealth.
Investments that qualify for business relief (BR) can be passed on free from inheritance tax upon the death of the investor, provided the shares have been owned for at least two years at that time. Owning BR-qualifying shares allows a person’s wealth to stay in their own name. BR-qualifying investments are a flexible option for investors, given that they are reversible should an individual’s circumstances change, or if the government decides to change rules or amend nil-rate bands in the future. Incorporating BR-qualifying investments into an estate planning strategy can help reduce inheritance tax liabilities, ensuring more wealth is passed on to the next generation.
Business relief qualifying investments
Research by Deloitte has suggested that up to 90% of heirs change their adviser following a transfer of wealth. Engagement across generations is therefore crucial for advisers seeking the best strategy for retaining clients. The younger generations should participate in the discussions relating to how they might invest capital once they take control of it. By doing so, advisers will have a greater chance of creating a successful long-term investment plan and retaining the beneficiaries as clients. Navigating the inter-generational landscape will undoubtedly remain a key advice theme over the coming decade.
Preparing for the future
Praetura Investments is an award-winning provider of alternative investments. Praetura Investments offers Enterprise Investment Scheme (EIS), Venture Capital Trust (VCT) and BR-qualifying offers that give investors access to unique asset classes. Praetura Investments diversifies the investments it makes on behalf of your clients to help you reach their goals. If you’re interested in finding out more, please visit www.praeturainvestments.co.uk
Who are Praetura Investments?
Praetura Investments is the trading name of Praetura Ventures Limited which is authorised and regulated by the Financial Conduct Authority, FRN 817345. Registered office address: Level 8, Bauhaus, 27 Quay St, Manchester. M3 3GY. Registered as a private limited company in England and Wales No.11439791.
By Praetura Investments
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As the largest manager of VCTs, Octopus is well placed to help you discover how they can benefit your clients. Visit this webpage to explore resources to help you get to grips with VCTs.
A driver for new business
onsumer Duty burst onto the scene last year and very quickly became the hot topic on every adviser’s lips, but as rightly outlined by the FCA, it is not a ‘once and done’ exercise. We are now rapidly approaching the 1 year anniversary of the introduction of the initiative, and firms now have just under 3 months to get their first annual report reviewed and board (or equivalent body) approved by 31 July 2024. This assessment will report on whether the firm is delivering good outcomes for its customers which are consistent with the [Consumer] Duty. The FCA guidance states that it should include the results of the monitoring that the firm has undertaken to assess whether products and services are delivering good outcomes in line with the Duty, any evidence of poor outcomes, and an evaluation of the impact and the root cause. It must provide an overview of the actions taken to address any poor outcomes and ensure they are not repeated. It should be remembered that there is a requirement to provide fair value on an ongoing basis, which also needs to be regularly tested. Of particular interest, will be the outcomes being delivered by firms utilising BR qualifying investments as part of their IHT planning strategies, and how their research and product selection might change as a result of poor outcomes being discovered. By the same token, it should bring into sharp focus the service providers who are going above and beyond to support advisers when it comes to navigating the Consumer Duty tides. In this article, we take a look at some of the key Consumer Duty considerations when assessing business relief products for your clients.
By Simon Harryman, Senior Business Development Director, Ingenious
Consumer Duty: what will be the outcome for BR products?
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We recently conducted our own adviser research around IHT planning and the Consumer Duty and found that there seems to be a prevailing sentiment of concern with 65% of our respondents stating that keeping up with regulatory change is the biggest challenge facing firms at the moment. Furthermore, 78% of advisers believe their research and due diligence process will need to change to align with the Consumer Duty, with the need to demonstrate how good outcomes will be achieved being the number one change, closely followed by having to show how fair value has been assessed.
It’s no surprise that IHT planning is a growing area of business for financial advice firms. Against a backdrop of soaring asset values and frozen thresholds, inheritance tax receipts continue to rise at an unprecedented rate and with this brings a developing client base. To address this growing need for robust estate planning, it is expected that business relief (BR) products will increasingly become a useful tool in an adviser’s kitbag. Therefore, making sure that your firm is applying the Consumer Duty lens correctly when it comes to making a BR case recommendation will also be crucial. Let’s dive a bit more into the specifics.
So, what will this specifically mean for IHT planning and BR?
Most customers approach IHT planning with a very clear objective: to maximise the amount of wealth passed to their beneficiaries by mitigating the impact of Inheritance Tax (IHT) on their investment upon death.
If a client sets out this objective, failing to mitigate the effects of IHT on death would mean, at least in part, failing to achieve a good outcome. In addition to the primary objective, the emphasis on considering the specific client’s needs means financial plans must consider the bigger picture. So what should this look like for BR clients? In addition to considering investor risk tolerance and the general suitability of an investment, this could be summarised in the following way:
Mitigate the impact of Inheritance Tax whenever death occurs. Protect and carefully grow wealth over the long term so the best possible legacy can be passed on to beneficiaries. Ensure fees and charges are reasonable while maximising the utility of the service to deliver fair value Offer flexibility, for instance, a facility for regular withdrawals or complete withdrawal if necessary. Consider any further specific needs of each client. They might be vulnerable and require particular assistance, or they could benefit from a care planning service.
As with any investment, inherent risks are associated with an investment in a BR-qualifying service. The Consumer Duty guidance puts further emphasis on the importance of proactively avoiding foreseeable harm to an investor and assessing the limitations of an investment. An inherently unpredictable risk for BR customers is that of an investor dying before IHT mitigation is achieved (BR investments must be held for two years before they qualify for IHT relief). Many investors considering BR investments are older, and with this, the risk of dying within the qualifying period becomes higher. With the annual report due imminently, this is where we may expect to see issues beginning to arise for firms who didn’t address this risk of clients dying within the qualifying period, and then the risk crystallising. The focus for firms must then shift to safeguarding clients against this risk. One proposed solution involves exploring insurance coverage for the IHT liability during the initial two years of investment as this could guarantee any potential liability is taken care of immediately upon subscription. However, this approach necessitates careful consideration of potential higher charges, aiming to balance growth protection with reasonable costs for optimal investor outcomes.
Proactively avoid foreseeable harm
If the insurance cost is kept to a minimum or even included at no additional cost to the investor, offering immediate IHT mitigation, then this becomes a key consideration in assessing the fair value of a service. Under the Consumer Duty obligations, this meets another one of the four main outcomes, ensuring that there is a reasonable relationship between the price paid for a product or service and the overall benefit a consumer receives from it. And this is how the IEP APEX evolved to the IHT planning solution it is today. It has been designed with the client in mind, aiming to achieve the best possible outcome for investors while simultaneously delivering fair value. For qualifying investors, IHT mitigation is achieved from the outset, with no additional cost to investors, therefore improving the likelihood of IHT planning success when compared with standard Business Relief services.
Where could IEP APEX come in?
If you would like to find out more about IEP APEX, please feel free to reach out to our dedicated Business Development team.
This communication is for professional use only and should not be distributed to, or relied upon by, retail clients. The value of an investment may go down as well as up and investors may not get back the full amount invested. Tax treatment depends on the individual circumstances of each client and may be subject to change in future. Ingenious does not provide financial or tax advice. Ingenious is a trading name of Ingenious Capital Management Limited which is authorised and regulated by the Financial Conduct Authority under Firm's Reference Number 562563. The registered office address is at 14 Bird Street, Parcels Building, London, W1U 1BU.
theingeniousgroup.co.uk investments@theingeniousgroup.co.uk
Senior Business Development Director, Ingenious
simon harryman
Source: Ingenious quarterly adviser survey 2023/24, 521 respondents
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The Interview Room:
exploring the tax-advantaged landscape with industry providers
Intelligent Partnership's Guy Tolhurst catches up with Nick Hawthorn, Fund Manager at Downing Fund Managers. Get to know Nick, understand his experience and what makes him tick plus hear all about Downing’s AIM strategy and what they offer with their AIM IHT services.
Nick Hawthorn, Downing
Joseph Cornwall looks after the AIM portfolios at Puma Investments. Here, he talks to Guy Tolhurst about how to mitigate point failures and avoid customer concentration and product set risks.
Joseph Cornwall, Puma Investments
Following a challenging period for the UK small-cap market, Stephen English, Investment Director at Stellar Asset Management, takes a closer look at what was driving market behaviour and why there is now opportunity to be found in UK small-cap stocks.
Stephen English, Stellar Asset Management
In this interview, Intelligent Partnership's Guy Tolhurst catches up with Thomas Lloyd-Jones, Managing Partner at Zenzic Capital. Here we get his take on what it's been like entering the Business Relief (BR) market as the new kid on the block and how they differ from other products on the market.
Thomas Lloyd-Jones, Zenzic Capital
Intelligent Partnership's Guy Tolhurst chatted to Raymond Greaves, Head of Equity Funds at TIME Investments, about AIM strategies, systematic processes for investing in smaller companies and the importance of a sector-agnostic approach.
Raymond Greaves, TIME Investments
Intelligent Partnership's Guy Tolhurst catches up with Henny Dovland, Business Development Director at TIME Investments. They explore what the IHT landscape looks like and how Business Relief (BR) fits in and general growth in the BR market. They also touch on the scenarios advisers may see to consider BR for their clients and the support available to them.
Henny Dovland, TIME Investments
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About Intelligent Partnership
We organise focused events and provide a suite of materials to keep advisers and industry professionals up to date with the latest developments and on course to meet their training and unstructured CPD targets. Our range of engaging and accessible resources includes:
ntelligent Partnership is the UK’s leading provider of insights and education in the tax advantaged and alternative investments space.
A deeper dive into individual providers giving their input on particular market issues and more detail on the strategies and offerings they have developed to address them.
Provider spotlight emails
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, celebrating the role of the UK SME investment and finance communities through our annual Growth Investor Awards.
Awards, conferences, webinars and workshops
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. www.accreditation.intelligent-partnership.com
Accreditation
A weekly snapshot of the latest articles, commentary and market data for financial services professionals on tax efficient investment and estate planning. These are sent alongside our regular CPD emails, providing the opportunity to earn unstructured CPD time based on relevant articles and content provided by ourselves and external providers. Please retain a copy of all emails and publications to be able to claim unstructured CPD hours.
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Free, award winning series including EIS, VCT, BR and AIM updates offering ongoing observations and intelligence, the latest thoughts and opinions of managers and providers, and a comparison of open investment opportunities. www.intelligent-partnership.com/ esearch-format/publications
Quarterly industry updates
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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
