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Industry Update | Nov 2023
Business relief
The inheritance tax net is widening and growing your estate planning business is a key opportunity
Have smaller companies reached their turning point?
Inheritance Tax: The future
Thought Leadership
Meet the Manager - Nick Hawthorn
The adviser benefit of using client IHT planning scenarios
BR under the bonnet: AIM focus
Product in focus: The Zenzic Estate Planning Service
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Industry Update | November 2023
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Introduction
Market Update
Considerations for Investment
Industry Analysis
Managers in Focus
What's on the Horizon
Further Learning
The BR universe today
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learning objectives
The Business Relief (BR) universe today
It certainly hasn’t been a quiet couple of months for the Inheritance Tax (IHT) market.
IHT receipts are on course for another record year, with recent data demonstrating a £400m increase from April 2023 to September 2023 in comparison to the same period last tax year. IHT receipts have, of course, been on an elevated trajectory over the last decade driven largely by soaring house prices and frozen allowances. With that in mind, recent speculation in the press has once again found Inheritance Tax in the epicentre of the UK’s political party battleground. The Conservative party is rumoured to be looking at either lowering or abolishing IHT, as soon as the Autumn Statement. However, the Chancellor has been playing down anything happening too imminently, suggesting that potential changes may be considered for the party’s election manifesto or next year’s spring budget. On the other side of the coin, the Labour party is also rumoured to be considering an inheritance tax raid with a proposed abolishment of Business Relief and Agricultural Property Relief. Whilst this hasn’t been confirmed, the rumour mill suggests this may come forward as part of the party’s election manifesto in 2024.
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 prominent manager makes a case for the value to be found in small-cap stocks and answers some of the questions facing the AIM market at the moment in Have smaller companies reached their turning point? In Meet the Manager - Nick Hawthorn, Fund Manager at Downing, we sit down with Nick to take a closer look at Downing’s AIM IHT strategies and what makes them different from other providers in the space. With much speculation and discussion on the two principal parties’ approach to IHT, what is actually likely to happen? One manager analyses the landscape in Inheritance Tax: The future. In anticipation of the latest release of An Adviser's Guide to Business Relief, sponsored by TIME Investments, we release a teaser article that takes a deeper dive into the AIM market in Under the BR bonnet: Focus on AIM. One manager takes a closer look at an inheritance tax planning scenario for a client who has sold a business within the last three years in The adviser benefit of using client IHT planning scenarios. In this Product in focus: The Zenzic Estate Planning Service article, we take a look at some of the distinct advantages the Zenzic Estate Planning Service can offer investors, and also share a video interview with Managing Partner, Thomas Lloyd-Jones.
In this issue of the Business Relief (BR) industry update
The BR Universe The inheritance tax net is widening and growing your estate planning business is a key opportunity Have smaller companies reached their turning point? Downing - Meet the Manager Inheritance Tax: The Future Under the Bonnet: Focus on AIM The adviser benefit of using client IHT planning scenarios Product in focus: The Zenzic Estate Planning Service About Intelligent Partnership
The small-cap effect - a sleeping giant?
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octopusinvestments.com support@octopusinvestments.com
Head of Investment Products, Octopus Investments
Jessica franks
Register now
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 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.
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: November 2023. CAM013134.
1 Source: HM Revenue & Customs, April 2023
Important information
Notes
Key risks
Inheritance tax receipts have been growing at a remarkable rate, by almost £1 billion a year.
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.
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webinar
To make the most of the growth opportunity, and to deliver good outcomes for clients, tune in to 'Growing through estate planning'. 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.
Growing through estate planning
- 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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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
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.
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.
By Jessica Franks, Head of Investment Products, Octopus Investments
here has been a market debate over whether the cyclical trends that have supported the significant relative performance of large caps versus their smaller peers are perhaps structural rather than temporary in nature. With some economists forecasting an end to interest rate hikes could this be the time to look again at listed smaller companies? Joseph Cornwall, Investment Manager at Puma Investments answers some of the questions facing the AIM market at the moment.
About the prevailing trends in UK equities, small caps and their impact on AIM How the Puma AIM portfolio has performed in Q3 Why lower valuations in the asset class offers opportunities for investors
AVAILABLE ON DEMAND
You’ll learn:
Please note that this webinar is for investment professionals only.
Webinar: The small-cap effect – a sleeping giant?
Joseph Cornwall
Investment Manager, Puma Investments
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By Joseph Cornwall, Investment Manager, Puma Investments
For those businesses with stable revenues, we are witnessing fewer pressures on profit margins as we go through the second half of the year. Supply chain difficulties have receded during 2023, with inflation concentrating around labour costs and support services price increases. Our companies are informing us that the jobs market is normalising and wage inflation is back under control, with a skew to higher salaries for lower-paid employees, reflecting the higher UK living wage as well as an understanding that inflationary pressures affect lower-paid employees to a greater degree. In providing market guidance, the strain on corporate margins has been replaced by caution over their revenue lines and the possibility of bad debts. Earnings downgrades due to a higher cost of debt have been a recent feature in the market also. Our AIM Portfolio service has been somewhat insulated from these risks by our preference for businesses with recurring or repeatable revenues and business models that do not require debt to reach an adequate level of return on equity. Nevertheless we would expect our businesses to be prudent over their cost bases where cyclicality exists in their operations, whilst retaining the capability required to capitalise on a market upturn. Reports from listed companies in the busy September and October period point to a deteriorating economic environment from July onwards as interest rate rises impact on demand. We are reassured that the overall characteristics of the portfolio, with good levels of free cash flow and sound balance sheets, will position the companies well through this cycle. A large majority of our portfolio’s holdings continue to perform in-line with market expectations.
In a time of elevated economic pressures, how are AIM companies adapting in this environment?
This is the most frequently asked question at the moment. As has been articulated by many others, forecasts of interest rates stepping down would be a catalyst for valuations, as that will cause investors to give greater weightings in their models to long-term rather than near-term earnings. We share the market’s caution that interest rates may have to stay higher for longer at around these levels, and we are factoring that into our company forecasts. This is based upon our expectations of more persistent labour inflation. Acquisitions of firms by private equity remains viable as interest costs show signs of stabilising, which allows purchasers to calculate an appropriate equity value. This provides liquidity for institutional investors to recycle their proceeds. Our portfolio companies continue to undertake acquisitions. Vendors valuations have become more reasonable. Whilst the management teams of AIM companies are less inclined to use debt given its higher cost, the cash flow generation within the businesses is being used to grow through acquisition. Allied to a weaker competitive environment as competitors struggle for financing, these businesses should reinforce their market position, which in turn should augur well for earnings per share as conditions improve. With valuations for the UK equity markets and small-caps both at lows, we are running at a double-discount to overseas markets. We recognise that there are trends around UK equity fund outflows that have caused marginal selling over the past two years, however as fund flows stabilise the market could move up as the market turns from a marginal seller to a marginal buyer and trading in shares reflects business fundamentals once again.
What do you think will be the catalyst for sentiment to change in UK Small Caps or AIM more specifically?
Against this tougher backdrop, particularly for growth companies, where does this leave AIM positioned as a market?
AIM has matured as a market over the last decade, with greater institutional ownership and the popularity of AIM services to mitigate inheritance tax. It remains a market for growth shares and a minority, albeit a significant proportion, of the constituents in the market are loss-making. We avoid loss-makers. An investment climate which is not favouring cash consumptive businesses has had a negative impact on AIM’s performance over the last two years, whereas AIM companies with strong balance sheets and that generate free cash flow have displayed better relative share price performance. A trend in redemptions from UK Equity funds, to include UK smaller companies funds, has created opportunities to identify mispriced assets, however all companies will need to adjust to a higher cost of capital, putting stresses on businesses with structurally low returns on capital. Connected to investors’ propensity for larger and more liquid stocks, and combined with cheaper ratings on equity valuation, AIM is seeing an elevated number of micro-caps cancelling their AIM listing. During 2023 for every new entrant to AIM, four are leaving the market. On a brighter note, de-listings remain low amongst our universe of stocks which contains around 300 companies, being those above £50m market capitalisation. Until economic and market conditions ameliorate, the ability to self-finance growth will be important and is a common trait within our portfolio.
Watch now
pumainvestments.co.uk advisersupport@ pumainvestments.co.uk
Investment Manager Puma Investments
joseph cornwall
Acquisitions of firms by private equity remains viable as interest costs show signs of stabilising, which allows purchasers to calculate an appropriate equity value.
Watch Now
pumainvestments.co.uk advisersupport@pumainvestments.co.uk
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n the latest of our Meet the Manager series, we met with Nick Hawthorn, Fund Manager at Downing Fund Managers. Having joined the group in 2015, Nick co-manages the Downing AIM IHT and ISA portfolio service and the Downing Strategic Micro-Cap Investment Trust. In this video interview with Intelligent Partnership, Nick sat down with us to take a closer look at Downing’s AIM IHT strategies and give an insight into what makes them different to other providers in the space.
The one thing I would look for in a manager is the type of person who has the time and is willing to roll up their sleeves and get hands-on with companies.
Meet the Manager
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Nick Hawthorn Fund Manager, Downing Fund Managers
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Key themes covered:
in conversation with Nick Hawthorn
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
Why Downing Fund Managers tends to play in a different investment universe when it comes to market cap size in comparison to its industry peers. The benefits of being valuation conscious - how selecting overlooked, smaller businesses present better valuation opportunities for investors' portfolios. After a tumultuous period for the AIM market, how has Downing’s AIM IHT service performed in comparison to the market index? How did their investment strategy provide insulation against the sharp market downturn? The importance of diversification and why the managers like to operate a benchmark and sector-agnostic strategy. What are the types of companies that the managers like to invest in?
in conversation with NICK HAWTHORN
Downing AIM ISA sales@downing.co.uk
Fund Manager, Downing Fund Managers
nick Hawthorn
Nick Hawthorn
he Prime Minister has between today and 17 December 2024 to call a general election. If an election is not called by this date, then parliament will be dissolved automatically, and an election would take place on 28 January 2025. In recent days, there has been much speculation, conjecture, spin, leaks, discussion on the two principal parties’ approach to a subject close to our heart; Inheritance Tax. The Conservative party has debated either lowering or scrapping IHT. The Chancellor has said that tax cuts in this year's autumn statement are 'virtually impossible' so potential changes may come forward as part of next year's spring budget or the party's election manifesto. The Labour party is considering whether to abolish relief such as Business Relief and Agricultural Property Relief. Its plans are likely to come forward as part of its election manifesto in 2024.
It is important to remember, that only 3.7% of deaths in the UK result in IHT being paid, so currently it is a tax paid by the few (c25,000). However, to Labour’s point, is there too much relief available? The Government’s latest figures indicate that Business Relief was claimed by c 3,000 people annually at a cost of c £1bn or 0.04% of GDP. This percentage has remained consistent since 2017/18. IHT relief though gifts to charities equates to a cost of c £750 million and is claimed by c10,000 people. Transfers between spouses and civil partners cost c £3.8bn or 0.16% of GDP and is the largest by value and most used by the UK population to relieve assets from IHT. There is no data on APR, which suggests it is not statistically important to the UK Government. IHT now generates c£7bn per annum for the UK Government and is forecast to rise to over £10bn annually. It’s a result of freezing nil rate bands in an asset inflationary environment. Therefore, the debate on IHT affects a tiny proportion of the UK population but it generates so much noise or chatter.
IHT is clearly an emotive subject given its association with the things which we all hold dear, namely our desire to keep living and the impact on our families. Alternatives to IHT such as a Wealth Tax might make sense but are difficult to implement as countries such as France and America have discovered. It could also be argued that the UK has a wealth tax already, it’s just called IHT and is only paid on death by beneficiaries rather than during a lifetime by the wealth owner. If we all stop for a moment, it's just semantics. IHT or levies on wealth are all some form of taxation. It is clearly important to some in terms of what it is called but can we really expect reduced taxes given the parlous state of the UK’s finances? What we might lose in abolishing IHT or its reliefs might be swapped for more income tax or another form of taxation, which in UK Government terms is more certain to collect and harder to relieve.
Is the abolition of IHT a vote winner? In the eyes of many it will be seen as a gift to a very few wealthy families and therefore an unfunded tax cut. We all know what happened when we last tried that…… In addition, we need to be careful of what we wish for, as what one giveth, one can taketh away through other taxes. The UK is not solvent. Is the abolition of IHT relief possible? The argument may be that as it affects so few people it is easy to implement. However, consider the reason why it was introduced. Mainly to stop family-owned businesses from breaking up and disposal to fund tax liabilities. Is that what a Labour Government would want, uproar from the lifeblood of the UK economy? In addition, these reliefs form part of an attraction for encouraging interest in SME such as through the EIS or the AiM market. Cutting off access to capital markets at a time when growth stimulus is needed to lift us away from near recessionary times again may well be counterproductive. Plenty of food for thought which we will revisit as the march towards an election gathers momentum.
www.stellar-am.com enquiries@stellar-am.com
Chief Investment Officer and CEO, Stellar Asset Management
Jonathan Gain
What is possible or likely?
Considerations
Inheritance Tax: the future
Always something to be done
In the meantime, and I make no apology for saying this, we have been given warning that IHT may change. We can sit and wait, or we can take action. Legislation is rarely retrospective so for those considering the value of their estate - take some action now. We know some excellent people who can help.
The Government’s latest figures indicate that Business Relief was claimed by c 3,000 people annually at a cost of c £1bn or 0.04% of GDP.
ACTION!
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By Jonathan Gain, Chief Investment Officer and CEO, Stellar Asset Management
The rules of Business Relief state the BR-qualifying shares cannot be listed on a recognised exchange. AIM is not categorised as a recognised exchange, but it is widely regarded as the world's most successful small company stock market: Since 1995, over 4,000 companies have joined AIM and more than £130bn has been raised in primary and secondary capital (LSE June 2023).
hilst perceptions about the quality of companies on AIM are mixed, it has had plenty of success stories, including:
There’s more to the AIM story
By Raymond Greaves, Head Of Equity Funds, TIME Investments
What gets me more excited are the companies [on AIM] that you've never heard of that are genuine world leaders in niche markets. Companies that can dominate a niche market are likely to be able to support high levels of profitability, generate lots of cash and use that cashflow to support further growth. This is one route to investing success and it's pleasing to find some excellent companies of this nature on AIM.
World-class fundraising from world-class investors
Sector split
by number of companies
by market capitalisation
The range of investors is virtually the same as those for companies on the main market, including the likes of Blackrock, Schroders and Henderson, albeit generally focused on the companies with larger market capitalisations.
AIM is a stock-picker’s market. A specialist active AIM investment manager should be able to combine BR qualification for 100% IHT relief, with market beating returns, even when the overall market performance is disappointing.
Most of the companies quoted on AIM are not as young as they are perceived to be – 76% listed before 2015, making them approaching a decade old or older at the time of listing, with some having been established substantially before that. (Feb 2023 LSE/TIME).
There is a very wide spread of business sectors on AIM – it’s not just resources and technology.
27% of AIM companies (around 200) have an operating profit of £10 million or more and 28% pay dividends (Feb 2023 LSE/TIME).
The market has matured nicely with the average market value of a company on AIM increasing by a factor of 7x between 2008 and 2021. Even after the major correction in 2022, the average market value is still a factor of 4.5x of the average value of £115 million in 2008. Also, trading volumes today are far higher than they were in the late noughties, despite far fewer companies, implying much better liquidity in general. (Feb 2023 LSE/TIME).
The vast majority of AIM quoted companies are now UK domiciled - it's much easier to understand and monitor a small business when it's closer to home.
As well as plenty of entirely UK-centric businesses, there are more than you might imagine with a global outlook, developing a strong international presence from UK roots. See below for three examples.
AIM has lighter-touch regulation than the main markets, not requiring a trading history or a minimum free float enabling founders to retain a large controlling position in their company. But there is regulatory oversight in the form of Nominated Advisers (Nomads). A Nomad guides the company through all regulatory requirements and attends board meetings to keep a close eye on business performance and ongoing compliance with AIM rules. Without a Nomad a listing will be cancelled. If they feel a company is breaking the rules they can resign their role, effectively delisting the offending company, unless it can find another Nomad to take over the role.
AIM-quoted UK companies with strong overseas earnings:
Keywords Studios A service provider to the global video games industry with over £2 billion market value. 82% of revenue is generated outside the UK, including Canada, US, Italy, Japan, Poland, China and India. Global Data A data analytics and consulting company with market cap around £1.5 billion. 85% of revenue is generated outside the UK and is very evenly spread around the world. RWS A provider of intellectual property translation, filing and search services, with a market value of about £1.5 billion and 89% of revenue generated outside the UK. The US generates more than half of revenues while Europe contributes about a quarter.
Source: LSE, September 2023
775+ companies
121
103
24
89
83
81
135
18
100
14
7
£79bn+ total market value
£6830m
£14543m
£4314m
£5851m
£9162m
£9122m
£15452m
£1209m
£9967m
£1473m
£288m
basic materials consumer directory consumer staples energy financials healthcare industrials real estate technology telecommunications utilities
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time-investments.com questions@time-investments.com
Head Of Equity Funds, TIME Investments
Raymond Greaves
Risk warnings The information contained in this email does not constitute and should not be construed as constituting investment or tax advice by TIME. Past performance is not necessarily a guide to future performance and there is no guarantee that the target return objectives of TIME:AIM will be achieved. You should recognise that your clients' capital is at risk and investors may get back less than they invest. The levels and bases of, and reliefs from, taxation may change in the future. Any favourable tax treatment, such as Business Relief, is subject to Government legislation and as such may change.
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Important information The information contained in this feature does not constitute and should not be construed as constituting investment or any other advice by TIME Investments. There is no guarantee that the target return objectives of TIME:AIM will be achieved and investors should recognise that their capital is at risk and they may get back less than they invest. The levels and bases of, and reliefs from, taxation may change in the future. The levels and bases of, and reliefs from, taxation may change in the future. Any favourable tax treatment, such as Business Relief, is subject to government legislation and as such may change.
Important information The information contained in this email/feature does not constitute and should not be construed as constituting investment or any other advice by TIME Investments. There is no guarantee that the target return objectives of TIME:AIM will be achieved and investors should recognise that their capital is at risk and they may get back less than they invest. The levels and bases of, and reliefs from, taxation may change in the future. The levels and bases of, and reliefs from, taxation may change in the future. Any favourable tax treatment, such as Business Relief, is subject to government legislation and as such may change.
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The Challenge
James is 65 and sold his stationery manufacturing business 18 months ago. He recently had a health scare and has been talking to his financial adviser about estate planning and reducing his estate’s inheritance tax (IHT) liability. He is keen to pass on as much of his wealth to his beneficiaries as possible.
lthough every client is unique, chances are that the financial challenges and problems they face over their lifetime will not be. That’s why Triple Point has created a range of client planning scenarios which can help you find opportunities to grow your business, as well as solve client problems. While the situations - and the clients - depicted in the scenarios are imaginary, they are derived from many years of real-life experience of working with financial advisers and their clients, and draw upon successfully implemented tax-efficient solutions. As a result, our client planning scenarios should resonate with a significant proportion of your client bank. Using different planning scenarios can help you gain an even better understanding of the needs of your clients. They can help you to cater to a more diverse client base, and to be more proactive with clients, by identifying issues they may not yet be aware of. And importantly, with the new Consumer Duty rules now in force, financial firms need to show they “act to deliver good outcomes for retail customers”. We believe scenarios are a helpful tool that can be used by advisers to encourage better conversations with clients and help demonstrate they are acting in their best interests. In this article, we take a closer look at an inheritance tax planning scenario for a client who has sold a business within the last three years. Please visit our website to see a wide range of Triple Point's client planning scenarios. For more planning scenarios visit tpeps.triplepoint.co.uk
Inheritance tax planning for clients who have sold a business within the last three years
By Billy Brown, Strategic Partnership Director, Triple Point
James had owned his business for 25 years, and it qualified for Business Relief (BR) at the time of its sale. The business sold for £5m. Due to the size of James’s estate, his residential nil-rate band (RNRB) will be used up on other assets. At the moment, his estate exceeds £2m and therefore his estate won’t be eligible for the residential nil-rate band. Without any estate planning, the £5m business sale proceeds will be subject to IHT at 40%, resulting in an IHT liability of £2m.
The Solution
James’s financial adviser recommends he uses part or all of the proceeds of the business sale to invest in a portfolio of BR-qualifying companies managed by an investment manager with BR experience.
The adviser explains that provided the proceeds of the sale are invested into BR-qualifying shares within three years, they are immediately exempt from IHT. James is also informed by his adviser that a BR-qualifying portfolio is a higher-risk investment than keeping it in cash, but James has agreed it is within his capacity for loss and meets his objective of estate planning. As James retains control over the investment, he can also take a regular income if he wants, either initially or at any point in the future. His adviser has also explained that if he goes ahead with this recommendation then, provided he continues to hold the BR-qualifying shares until his death, his IHT bill on the proceeds from the business sale will be reduced to £0.
This is a hypothetical estate planning scenario. For simplicity, this illustration does not take into account investment growth or charges for BR-qualifying shares. It is based on the tax rules as at January 2023 which could be subject to change. It is assumed that the NRB and the RNRB have already been used. Tax rules and reliefs are subject to change and the availability of business relief depends on the company in which the investment is arranged establishing and maintaining its tax status. The availability of tax reliefs for investors will also depend on their personal circumstances.
A potential solution
James's proceeds from the sale of his business
£5 million
Cash
Sell down and invest in BR-qualifying shares
Value after three years:
James dies after three years
IHT bill on share portfolio
£5 million x 40% = £2 million
IHT bill on BR-qualifying portfolio
£5 million x 0% = £0
Passed on to beneficiaries
£3 million
That's a saving of £2 million
triplepoint.co.uk contact@triplepoint.co.uk
Strategic Partnership Director, Triple Point
Billy Brown
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
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
n January 2020, real estate credit provider Zenzic Capital launched the Zenzic Estate Planning Service (‘ZEPS’) and entered the popular Business Relief (BR) / Inheritance Tax (IHT) market for the very first time. Against a macroeconomic backdrop of rising IHT liabilities, the team witnessed a growing market opportunity for a new BR product to enter the scene that enabled investors to seek IHT shelter, which also presented a diversified offering away from some of the more prolific providers in the space. Zenzic Capital are real estate specialists at the core and it is this deep sector expertise that sets them apart. ZEPS offers an attractive return to investors irrespective of the IHT savings, targeting an annual 6% rate of return, and well above the market average of 3-3.5%. This has been reflected in the team’s recent track record of performance. As always, and it goes without saying, past returns are no indicator of future performance. In this ‘product in focus’ feature article we take a look at some of the distinct advantages that ZEPS can offer investors, and we also share an insightful Intelligent Partnership video interview with Zenzic Capital’s Managing Partner, Thomas Lloyd-Jones.
ZEPS aims to help investors find attractive, stable returns by investing in shares issued by companies whose subsidiaries will deploy capital into a diversified portfolio of loans to real estate companies secured against a wide range of real estate assets.
What can we offer?
6% - Target annual rate of return Asset-backed investment £25,000 minimum investment Growth &/or Income investment options 40% potential IHT saving Bonus return profit share after fees
CASE STUDY
Zenzic completed a £1.1m mezzanine facility, provided through equity release to support an established SME housebuilder in a development project. This project included 25 units, featuring a mix of one commercial unit, 16 private units, and 8 affordable units. Prior to executing the investment, Zenzic conducted a rigorous and comprehensive due diligence process spanning over three months. This exhaustive analysis encompassed an in-depth evaluation of the project's location, demographics, planning considerations and property valuations, as well as an assessment of the developer’s financial strength and the expertise of its management team. Zenzic’s risk management and mitigation analysis ensured a thorough understanding of potential challenges and allowed it to devise proactive strategies to safeguard the investors' interests. In a remarkable nine months ahead of the maturity date, Zenzic successfully exited the investment. This exemplifies our commitment to diligently managing investments and proactively capitalising on favourable market conditions when prudent, to enhance returns for our valued investors. This project marked Zenzic's second collaboration with the developer, following a highly successful debt offering in 2020, which was successfully redeemed in 2021.
PORTFOLIO CASE STUDY
Capital preservation
Diversified underlying portfolio secured against UK real estate
Access and control
Investors maintain access to and control of their investment where they can submit a request to withdraw capital at any time
Tax efficiency
Shelter investment from IHT through BR
Speed
Investments expected to benefit from BR after just two years
Loans mature with different repayment timelines creating natural liquidity in the portfolio
Operational liquidity
Experienced team
An extensive team of finance and real estate professionals with a strong track record
in conversation with Thomas Lloyd-jones
Key features:
Zenzic completed a £1.1m mezzanine facility provided through equity release to support an established SME housebuilder, in a development project. This project included 25 units, featuring a mix of 1 commercial unit, 16 private units, and 8 affordable units. Prior to executing the investment, Zenzic conducted a rigorous and comprehensive due diligence process spanning over three months. This exhaustive analysis encompassed an in-depth evaluation of the project's location, demographics, planning considerations, property valuations, as well as an assessment of the developer’s financial strength and the expertise of its management team. Zenzic’s risk management and mitigation analysis ensured a thorough understanding of potential challenges and allowed it to devise proactive strategies to safeguard the investors' interests. In a remarkable nine months ahead of the maturity date, Zenzic successfully exited the investment. This exemplifies our commitment to diligently managing investments and proactively capitalising on favourable market conditions when prudent, to enhance returns for our valued investors. This project marked Zenzic's second collaboration with the developer, following a highly successful debt offering in 2020, which was successfully redeemed in 2021.
Term: Security: LTGDV: Exit:
24 months (18-month build and 6-month sale) A full security package for a facility of this nature including a second legal charge over the land. 63% Open market sale of all units.
zenziccapital.com info@zenziccapital.com
Managing Partner, Zenzic Capital
Thomas lloyd-jones
By Thomas Lloyd-Jones, Managing Partner, Zenzic Capital
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main BR investment structures:
n general, Business Relief-focused estate planning services for personal client investment can be can be broadly split between AIM and non-AIM portfolios (those investing in entirely unlisted/unquoted assets). Investors must have ownership of the underlying assets: collective structures would not qualify for BR. There are two typical structures: a discretionary managed portfolio, or an investment in a single company that undertakes the underlying trades.
By Raymond Greaves, Head Of Equity Funds, Time Investments
Head Of Equity Funds, Time Investments
Self-selected BR-qualifying companies. Shares held directly. Dependent on investors' time and experience of investment analysis, portfolio construction and ongoing monitoring. Very risky without the necessary expertise.
DIY Portfolio
Likely to be an investor with close ties with a particular company and expertise on its sector with very clear insights into its activities and prospects for continued operation. Lack of diversification increases the risk.
Single Company
BR qualifying shares in AIM-quoted companies (about 50% to 70% of AIM are qualifying). Shares must be owned directly by the investor for BR qualification.
AIM BR: Discretionary Investment Management
Completely unlisted shares in BR qualifying companies. The investor will have beneficial ownership (via a custodian) of a special purpose vehicle (SPV), a holding company, shares in an unquoted company, or an interest in a partnership. This is not a bespoke discretionary service.
Non-AIM BR: Discretionary Investment Management
BR qualifying shares in AIM-quoted companies. The shares are held within a stocks and shares ISA. Managers are aiming to make the investment income tax, capital gains tax and Inheritance Tax-free. The additional permitted maximum (APS) and non-eligibility of capital losses made within an ISA to be offset against other capital gains are important factors to consider.
AIM BR: AIM Discretionary ISA Portfolio
Shares that are eligible for the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment (SEIS).They generally qualify for BR because the investor will hold shares in an unquoted trading company. The ownership structures available match those for non-AIM BR shares. Combining BR and EIS/SEIS tax reliefs in one investment is typically a riskier strategy than BR alone as there are additional qualification criteria over and above the BR qualification criteria that demand a significant risk of loss and therefore the investees tend to be smaller younger companies. EIS and SEIS tax reliefs offer 30% and 50% income tax relief respectively, 100% CGT relief, CGT deferral relief (EIS) or CGT reinvestment relief (SEIS) and loss relief. Shares must be held for at least three years to claim EIS or SEIS reliefs.
EIS/SEIS
For more detailed information regarding the various BR investment structures, visit pages 19 to 24 of the second edition of An Advisors Guide to Business Relief
Business Relief-focused estate planning services for personal client investment can be can be broadly split between AIM and non-AIM portfolios
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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
