BR November

12

Diversification

Market composition

Add to this the opportunity for diversification afforded by the extensive range of BR-qualifying businesses, and you have a useful tool with investment risk mitigation features.

The average open offer invests in 16 companies, typically scattered across various sectors, aiming for growth and diversification.

As the following graph shows, many BR investment managers set up a single company and investors become shareholders of that company. Then it is that company that invests in third party BR-qualifying companies. This suggests that the real average number of targeted investees is very likelyhigher than 16, the current average, including managers who use single
companies to invest through.

This section takes a look at the state of the Business Relief market based on the number of offers in the market. Unless otherwise stated, this analysis uses data obtained from the MICAP platform and is correct as of 21 September 2022.

Latest government data show that inheritance tax (IHT) receipts for April to August 2022 were £2.9 billion, which is £0.3billion higher than the same period a year earlier. There was a previous spike in receipts from October to November 2020, March to August 2021 and in March 2022.

The trend seems to confirm media reports that Britons are paying more IHT, causing investors to look for IHT mitigating strategies. Business Relief (BR), of course, reduces the IHT applicable to shares in a qualifying, making it a favoured choice for many estate planners.

TARGET NO. OF INVESTEE COMPANIES BY OPEN OFFERS

403020100

40,000000

Open offers

20,000000

16.231884

In spite of major challenges in the economy and persistent political uncertainty, the BR sector remains strong. There are currently 69 open BR offers, up by an impressive 6% since our last analysis in April, when there were 65.

1,000000

AVERAGE

MODE

MIN

MEDIAN

MAX

Investment strategy

Target return

The open offers adopt four major investment strategies: Capital Preservation and Growth (39.1%); Growth (37.7%); Growth and Income (18.8%); and Capital Preservation and Income (4.4%).

Managers seem to favour sectors that are better positioned for potential growth amid today’s inflation and rising global tensions. This strategic asset allocation plan would seem to work very well in BR, which has relatively few sector-barring exclusions. (Although businesses dealing mainly in securities, stocks or shares, land or buildings, or the making or holding of investments are excluded).

Indeed, the current rules allow a wide range of BR qualifying investments to UK investors. This includes anything from forestry, renewable energy (solar/hydro power etc), property finance to asset backed businesses such as pubs, health clubs, hotels.

Stocks listed on the Alternative Investment market (AIM) also typically qualify for BR relief.

BR offers investors opportunities to hedge their investments by investing in businesses that are likely to prosper during periods of inflation. Some underlying investments that are BR qualifying are positively correlated with inflation - for example, shorter term loans where rates are negotiated on a regular basis.

Arguably in recovery mode, after a steady decline throughout the pandemic, the average target return now stands at 4.34%, up nearly 30% from a year ago.

As noted in our last report, there are variations of the target return by investment strategy. Currently, open offers target up to 7% for Capital Preservation and Growth, and up to 10% for both Growth and Growth & Income.

In mid-September, the Office of National Statistics (ONS) announced that the Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 8.6% in the 12 months to August 2022, down from 8.8% in July.

This means that some open offers are still targeting inflation-beating returns in spite of considerable market challenges.

4.31%4.14%3.88%3.34%4.34%

January 2020July 2020May 2021August 2021April 2022

OPEN OFFERS

MAX

AVERAGE

MODE

MEDIAN

4.34

3

4

10

TARGET RETURNS

Fees & charges

MARKET COMPOSITION OF OPEN OFFERS BY INVESTMENT STRATEGY

Out of a total of 13 potential fees, 9 have decreased since April.

The AMC Charged to Investee Company declined the most, dropping by 10%. The Initial Charge to Investors Excluding Adviser Fee went down by 4%. The AMC charged to investors, which has been sliding in recent months, barely rose by 1%.

18.8%

39.1%

OPEN OFFERS

TARGET RETURNS OF OPEN OFFERS BY INVESTMENT STRATEGY

37.7%

SEPTEMBER 2022

APRIL 2022

CHARGES

CHANGE

INITIAL CHARGE TO INVESTORS EXCLUDING ADVISER FEE

INITIAL CHARGE TO INVESTEE COMPANY

TOTAL INITIAL CHARGE

AMC CHARGED TO INVESTOR

AMC CHARGED TO INVESTEE COMPANY

AMC

ANNUAL PER FEE

EXIT PER FEE

ANNUAL PER HURDLE

EXIT PER HURDLE

INITIAL DEAL FEE

EXIT DEAL FEE

ANNUAL ADMIN CHARGE

AVERAGE

0.90%0.3%1.18%0.88%0.35%1.18%0.71%0.14%0.26%1.42%0.44%0.49%0.30%

0.94%0.29%1.2%0.87%0.39%1.21%0.78%0.15%0.28%1.54%0.45%0.48%0.29%

-4%+3%-2%+1%-10%-2%-9%-7%-4%-8%-2%+2%+3%

CAPITAL PRESERVATION & INCOMECAPITAL PRESERVATION & GROWTHGROWTHGROWTH & INCOME

4%3.96%5%9%

Capital Preservation & Income

Capital Preservation & Growth

Growth

Growth & Income

Investee companies

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

Portfolios of AIM quoted companies typically target growth. As for asset-backed companies, the risk of a complete loss of capital is much lower because the assets used to back the investment can be used to offset any capital losses due to defaults.

This means that BR managers seem to focus on growth and security—two vital themes during an inflationary era.

Clients love that they are helping the UK economy by investing into BR-qualifying investments, while also saving tax for their beneficiaries. It’s a win/win.

Minimum subscription

Dominique Butters, Executive Business Development Manager, Blackfinch Investments.

BR remains comparatively affordable for its purpose. The most common minimum subscription for the open offers is £25,000, though it can go as low as £15,000. But even a £15,000 BR investment can save £6,000 in IHT.

MARKET COMPOSITION OF OPEN OFFERS BY INVESTMENT STRATEGY

TARGET NO. OF INVESTEE COMPANIES BY OPEN OFFERS

£200,000

200000150000100000500000

55.7%

44.3%

£48,478

£25,000

£15,000

AIM listed

Asset-backed

AVERAGE

MODE

MIN

MEDIAN

MAX

66.7%

22.2%

11.1%

3. Considerations for Investment

Market CompositionMICAP Market Snapshot

10

What the managers say

So how are the managers feeling about the BR market and overall investment market conditions? Here's what they have to say.

T h e R u s s i a - U k r a i n e c r i s i s h a s b e e n c a u s i n g k n o c k - o n e f f e c t s g l o b a l l y . W h a t d o y o u s e e a s t h e w a r ’ s i m p a c t o n B u s i n e s s R e l i e f ?

Many UK trading companies are facing the effects of higher inflation, rising interest rates and fuel costs, plus supply issues. However, some companies carrying out BR-qualifying trades have benefitted from the increase in energy prices and enjoyed higher returns. Clients feel all the more inspired to invest into renewable energy projects in the UK to future-proof our energy needs.

A I M - q u o t e d s h a r e s c a n a t t r a c t B R i n v e s t m e n t i n h o p e s o f p o t e n t i a l I H T r e l i e f . W i t h s h a r e p r i c e s s u f f e r i n g f r o m t h e c u r r e n t c r i s i s , w h a t h a s b e e n t h e i m p a c t o n B R i n v e s t m e n t ?

Clients who choose to invest into AIM shares for BR are usually more sophisticated clients who are very familiar with market volatility. They see a golden opportunity at the moment to buy shares at a substantial discount. Therefore, clients are not only getting their IHT planning done but also have the opportunity for significant capital growth.

DOMINIQUE BUTTERS

Executive Business Development ManagerBlackfinch Investments

People who opt to pay inheritance tax in instalments to avoid selling the family home are being hit hard by the recent interest rate hikes. To what extent should investors and their advisers take into account this often forgotten and hidden cost of IHT?

Clients often want to retain the family home for sentimental reasons. Therefore, even if interest rates are rising it won’t matter to them. However, if clients are wishing to dispose of the home with interest rates rising
and property prices at an all-time high it could be a very opportune time for them
to sell.

T h e R u s s i a - U k r a i n e c r i s i s h a s b e e n c a u s i n g k n o c k - o n e f f e c t s g l o b a l l y . W h a t d o y o u s e e a s t h e w a r ’ s i m p a c t o n B u s i n e s s R e l i e f ?

The conflict in the Ukraine and subsequent disruption in the supply of natural gas has caused wholesale electricity prices and inflation to rise sharply. Business Relief (BR) portfolios that benefit from high inflation or high electricity prices should be able to withstand this period of economic uncertainty. Conversely, BR portfolios that are highly leveraged may suffer if interest rates continue to rise.

A I M - q u o t e d s h a r e s c a n a t t r a c t B R i n v e s t m e n t i n h o p e s o f p o t e n t i a l I H T r e l i e f . W i t h s h a r e p r i c e s s u f f e r i n g f r o m t h e c u r r e n t c r i s i s , w h a t h a s b e e n t h e i m p a c t o n B R i n v e s t m e n t ?

Market volatility has increased and fears of an impending recession have affected the share prices of fast growing companies such as technology providers. Whilst not fully immune, the lower volatility and more defensive AIM companies in traditional industries have performed better than the benchmark. Such businesses tend to hold higher cash reserves and generate consistent profits and are therefore better placed to withstand a recession.

STEPHEN DANIELS

Head of InvestmentsTIME Investments

People who opt to pay inheritance tax in instalments to avoid selling the family home are being hit hard by the recent interest rate hikes. To what extent should investors and their advisers take into account this often forgotten and hidden cost of IHT?

The repayment rate has increased 100bps from the start of the year and, with potential further rate hikes in the future, advisers and their clients would be sensible to consider this cost. Some BR providers participate in the direct payment scheme, which may provide an optimum route to directly settle an estate, in part or in full, without the need to sell other assets, like the family home.

T h e R u s s i a - U k r a i n e c r i s i s h a s b e e n c a u s i n g k n o c k - o n e f f e c t s g l o b a l l y . W h a t d o y o u s e e a s t h e w a r ’ s i m p a c t o n B u s i n e s s R e l i e f ?

Inflation has now become a structural issue as permanent constraints on supply have become evident and all the ‘free’ money pumped into the global economy in 2020/2021 overheating the system. The war in Ukraine has only added to this inflationary pressure, driving further spikes in energy and commodity prices, and representing its own set of supply-side challenges.

These high rates of inflation will likely cause typical Business Relief investors to start to consider growth more closely, not just capital preservation. Erosion of capital value through inflation is now a real problem.

A I M - q u o t e d s h a r e s c a n a t t r a c t B R i n v e s t m e n t i n h o p e s o f p o t e n t i a l I H T r e l i e f . W i t h s h a r e p r i c e s s u f f e r i n g f r o m t h e c u r r e n t c r i s i s , w h a t h a s b e e n t h e i m p a c t o n B R i n v e s t m e n t ?

DARYL THORPE

PartnerZenzic Capital

With the AIM market under-performing and the prospect of rising interest rates and concerns over economic growth acting as headwinds to growth company valuations, it will take some time for the market to bounce back. BR investors will start to consider diversifying their BR portfolio to include non-AIM investments that attract more stable

People who opt to pay inheritance tax in instalments to avoid selling the family home are being hit hard by the recent interest rate hikes. To what extent should investors and their advisers take into account this often forgotten and hidden cost of IHT?

This further highlights the need for investors and their advisers to work together and plan for IHT, involving the beneficiaries in the process too to minimise the impact any IHT bill will have. This additional cost does however need to be balanced with the ability of families to settle the liability over ten-year period and not have to emergency redeem other less liquid assets at potentially a less than optimal time in the cycle.