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business relief
Industry Update - q1 2021
COVID-19, new BR Context budget news what the managers say market composition IHT changes what's ahead
FIND INSIDE
INTRODUCTION
1
MARKET UPDATE
2
industry analysis
4
considerations for investment
3
MANAGERS IN FOCUS
5
WHAT'S ON THE HORIZON
6
FURTHER LEARNING
7
The latest news, updates and statistics on BR
In partnership with:
quarterly Industry Update
1. INTRODUCTION
2. MARKET UPDATE
3. CONSIDERATIONS FOR INVESTMENT
4. INDUSTRY ANALYSIS
5. MANAGERS IN FOCUS
6. WHAT'S ON THE HORIZON
7. FURTHER LEARNING
1. Introduction
Foreword Opening statement Update overview Key findings
Foreword Opening Statement Update Overview Key Findings
Covid-19: a Changed Context for BR BR Developments AIM Business Relief Budget News Thought Leadership - Downing Thought Leadersnhip - TIME What the Managers Say
2. market update
Market Composition Fees and Charges ESG in BR The Cost of BR
3. considerations for investment
Carbon Neutral Economy offers Opportunity Spring Budget Driving Green Economy Reframing Excepted Cash Assets
4. industry analysis
Beringea Blackfinch Downing Octopus Seneca TIME BR Solutions Comparison
5. managers in focus
Upcoming IHT Changes Moving on from Covid-19: What's Next What the Managers Say
6. what's on the horizon
Learning Objectives CPD and Feedback About Intelligent Partnership Disclaimer
7. further learning
0
guy tolhurst
foreword
MENU
Foreword
INTRODUCTION / FOREWORD
W
ith confidence starting to return to business as the country slowly starts to re-open after virtually a full year of pandemic-related lockdowns and the massive and rapid roll-out of Covid-19 vaccinations continues, it seems that things are looking up. But there’s no denying that the virus has left its mark and that it will probably land a few more shots before we really see the back of it. Aside from the obvious impact of well over 100,000 lives lost, Covid-19 has impacted the long term physical and mental health of many more, dented life expectancy, battered business and left a gaping hole in government coffers. Yet the much anticipated March 2021 Budget signalled a spending and investment-based recovery, without the expected major tax hikes. This left a cocktail of old and new drivers highlighting the continuing utility of Business Relief (BR). Understanding the Covid-19 landscape is crucial here, including how it has shifted and accelerated issues such as ESG and professional communications. There is still much left to unfold in what Chancellor Rishi Sunak called, “the work of many governments, over many decades” to balance the UK’s books again. But with Brexit fallout still in the mix, there are also other challenges and opportunities to consider. In this update, we’ve taken a look at these variables, including an examination of how the government’s current push towards a carbon neutral economy might intersect with BR’s popular renewable energy investment sector. And we’ve researched how much of the BR market is involved with renewable energy, putting BR investment managers in a good position to benefit from growing trends in ESG-focused investment. We’ve dug into the indirect impacts of the budget, taken a look at the latest IHT projections and considered some of the shifting ground, such as how much spare cash in a business is now considered as excepted assets, something especially relevant after many had their cashflows turned off for months. Our aim is to help you keep your finger on the pulse of BR and what it can do for the right clients, and to remind you that, especially in the midst of the unknown, tax and estate planning remains eminently sensible, with the right knowledge and context. You might also be interested in our recently published second edition of ‘A Professional’s Guide to Estate Planning’, including a Business Relief section. I hope you enjoy reading this Update. I welcome any feedback and please do share this update with your fellow professionals.
managing director, intelligent partnership
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opening statement
INTRODUCTION / OPENING STATEMENT
n a speech in Cape Town in June 1966, Robert Kennedy said: “There is a Chinese curse which says 'May he live in interesting times.' Like it or not we live in interesting times. They are times of danger and uncertainty; but they are also more open to the creative energy of men than any other time in history.” That speech really resonates today when we are all adjusting both our work and personal lives to the dramatic changes brought about by the pandemic Covid-19. It has had unforeseen lifestyle and psychological changes on both ourselves and our clients. One of the positive aspects of the change is that of pressing the fast forward button on older people’s grasp of technology. So many older clients would never have taken to Zoom and Facetime but when the alternative was to be cut off from the lifeline of family and friends, the need to communicate and for connection with others made many of them open to trying and many have been delighted with their success. They will continue to use it in the future as well as enjoying renewed face to face contact. This will have a permanent impact on how business is conducted by financial advisers. It has already helped practically in advice areas where inter-generational meetings are needed, such as estate planning or where geographical considerations would historically have been a barrier to effective discussions. Another change that has occurred in the pandemic is that of families having those ‘ difficult conversations’ that are so often put off as too hard to deal with. It has meant that more people are discussing with their families and friends matters such as wills, powers of attorney, inheritance and their wishes regarding care and end of life support. However research by Solicitors for the Elderly in 2020 showed that there was a gap between having the conversations and it actually being translated into action through making a will, putting a Power of Attorney into place or actively beginning to engage in estate planning for the first time. This is understandable as these are important steps to take and require reflection – but without too much delay. It’s therefore a good time to have these conversations with clients and prompt them to act upon them. Here empathy and good communication skills are key. The role of a trusted adviser has never been more relevant and many later life advisers have had feedback about the important role they have played as a ‘ trusted friend’ who could objectively but sensitively guide the families to work towards a suitable scenario for matters such as inheritance , including what business relief can do. The negative side of the pandemic has clearly been that so many people have found themselves in vulnerable circumstances. According to FCA-updated figures there are now 27.7 million adults in vulnerable circumstances. This is a 15 % increase on February 2020. Financial advisers have proved a huge asset to their clients by continuing to provide that steady, objective, clear thinking advice around the wider aspects of later life financial planning. They have also been able to help support their clients to prevent them from entering into scams which have proliferated as a result of people being in more vulnerable circumstances. The personal and economic circumstances of the pandemic have clearly provided an opportunity for financial advisers to demonstrate the benefit to the consumer of taking advice. It has allowed them to position themselves to rise to the challenges and opportunities that post Covid-19 will present. For those who can differentiate themselves and demonstrate both technical knowledge and empathy the days ahead provide new opportunities to build lasting client relationships. And one of the areas that could really prove its utility for the right clients, is business relief.
The role of a trusted adviser has never been more relevant and many later life advisers have had feedback about the important role they have played as a ‘ trusted friend’ who could objectively but sensitively guide the families to work towards a suitable scenario for matters such as inheritance
tish hanifan
Co Chair Society of Later Life Advisers (SOLLA)
I
update overview
INTRODUCTION / UPDATE OVERVIEW
We couldn’t do this without the help and support of a number of third parties who have contributed to writing this update. Their contributions range from inputting into the scope, sharing data, giving us their insights on the market, providing copy, and peer reviewing drafts. So, a big thanks to: Tish Hanifan of SOLLA, Mark Taylor and Shane Elliott of Beringea, Dominique Butters and Sarah Hendy of Blackfinch, Tom Mullard of Downing, Jessica Franks of Octopus, Chris Hood, Richard Manley and Chris Bullough of Seneca, and Henny Dovland and Stephen Daniels of TIME. Their input is invaluable, but needless to say any errors or omissions are down to us. We have relied upon MICAP for most of the data that we have based the update upon. MICAP is part of the same group of companies as Intelligent Partnership. We also carried out our own extensive desk research and interviews to verify their data. The update is made possible by our sponsors, who have contributed copy to the update and supported us by helping to meet production costs. So, a big thanks to: Beringea, Blackfinch, Downing, Octopus, Seneca and TIME.
Business relief qualifying shares and share sales Business Relief allows investors who hold Business Relief qualifying shares to sell those shares. As long as they purchase replacement Business Relief qualifying shares within three years of the sale, the two year BR qualification clock is not reset. As the examples of Earthport, WYG and PTSG show, there are examples where it may be worth investors considering earning an immediate windfall, which can then be reinvested in other options a manager considers better long term value. However, investors should be aware of the risk that, should they pass away in between an investment being sold and any replacement shares being acquired within the three year window, they would not be able to claim Business Relief
acknowledgements and thanks
Find out more at MANAGERS IN FOCUS
Readers can claim up to 2 hours’ structured CPD (excluding breaks). By the end of the update readers will be able to: • Identify the main developments and news in the Business Relief market. • Outline how Business Relief sits within the current IHT landscape. • Evaluate the key fees and charges applied by Business Relief managers. • Recognise the various factors that will affect the Business Relief market in the coming months. • Define the types of open Business Relief offers available on the market. • Benchmark current products and providers against each other on key investment criteria
learning objectives for cpd accreditation
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After you have reviewed this publication and before we fulfill your CPD certification request, we will be requesting your feedback on it. Your collaboration will assist us to enhance the learning activity, and will inform improvements to future publications.
INTRODUCTION / KEY FINDINGS
number of those globally expected to have Covid-19
in 200
7.25%
(highest since WWII)
2021 UK GDP growth forecast
57%
have an income option vs 38% 2 years ago
of open BR offers
0.04%
of GPD
10%
in open br offers since july 2020
increase
X2
in March 2021 compared to March 2021
no. of UK residential housing buy/sell transactions
60%
offer ESG element
IHT receipts by 2025/26
billion
£6.6
key findings
cost of business relief (2019/20)
of open non-AIM funds
2. Market update
COVID-19: A CHANGED CONTEXT FOR BR br developments aim business relief budget news A WIDER PERSPECTIVE IN ESTATE PLANNING THE GROWING NEED FOR INHERITANCE TAX PLANNING what the managers say
COVID-19: A CHANGED CONTEXT FOR BR
MARKET UPDATE / covid 19: a changed context for br
In January, a survey conducted by the Federation of Small Businesses suggested more than quarter of a million small businesses might close in the next 12 months.
et, as the country starts to open up again, sentiment has been boosted by the success of Britain's mass vaccination programme with the pandemic now seen as having less of a negative impact than previously feared. In April, Deloitte's chief economist Ian Stewart said of large UK firms, "Having come through the deepest downturn in 300 years UK businesses are firmly focussed on growth. Pent-up business and consumer demand are set to power a strong profits recovery." This optimism has been palpable nationwide, but a big question is how evenly the recovery will be spread? A recent article published by the London School of Economics stated that, “the brunt of the impact will be on the smallest enterprises that are likely to be the least prepared”, and they are certainly likely to have much less capital at their disposal. But, there is a strong argument that those that have access to funding and guidance through BR managers, may find themselves with much better prospects.
Y
Advice needs accentuated BR offers a fast route to IHT relief. But during the pandemic, for some, this will have appeared to have been immediate. The sad truth is that many advisers’ clients will have died unexpectedly during the last year. Where the deceased-owned businesses were undertaking BR qualifying activities for over two years, even if no actual estate planning had been carried out, a well-informed adviser will have been in a position to offer a little piece of good news at a dark time. Simply being aware of BR and the requirements for claiming may well have added significant value to the adviser’s service for a bereaved family and beneficiaries and created a lasting bond. A hand-grenade in government plans When Boris Johnson was elected as Prime Minister in December 2019, he did so on the back of a manifesto that, among other things, pledged not to raise the rate of income tax, VAT or National Insurance. The Conservative manifesto made much of wanting, “to create a high-wage, high-skill, low-tax economy” in which, “we not only want to freeze taxes, but to cut them too.” The intention was to, “keep costs down for small businesses – rather than hiking their taxes and crushing Britain’s prosperity” and there was a proud declaration that successive Conservative governments had, “doubled the personal allowance to £12,500, so that everyone gets to earn a decent amount before they are taxed.” As we’ll see in the ‘Budget news’ later in this section, Covid-19 has directed attention much more closely to policies that will facilitate repaying the huge cost of actions designed to limit the damage to the nation’s health. And, while the changes announced in the March 2021 budget were relatively mild, there will be ongoing opportunities for more, with the Chancellor stating that, “It is going to be the work of many governments, over many decades, to pay it back.” So, it seems the time to be tax-planning is right now and BR can very much play a part in Mr Sunak’s ‘investment-led recovery’.
wiped off life expectancy by Covid-19
1 year
The uncertainty created by Covid-19 is not just economic in nature. Life expectancy has been dented with Oxford University research published in January 2021 showing that, in 2020, it dropped for both men and women by over a year, wiping out gains made on life expectancy in the past decade. However, given the demographic context which has seen average life expectancy from birth in the UK go up from almost 72 in 1970 to just under 80 in 2021, even after the worst impacts of Covid-19, this isn’t as shocking as it might, at first, seem. And we’ve already seen, with the various vaccinations that have been developed, that innovations and advancements in health care and growing understanding of lifestyle factors indicate an eventual resumption in the extension of life expectancy. As we know, longer lives are very likely to make later life and estate planning more complex, with more potential drains on capital and unexpected circumstances. Not only does this underline the utility of planning options that facilitate investment growth, but also those with the flexibility to allow access for unpredictable costs.
Ongoing health consequences One area that is particularly important is later life care and Covid-19 may still be making an impression here many years after medical professionals have got this outbreak under control: Research is now underway into the growing evidence of the impact of Covid-19 on the central nervous system and the associated risks of later life cognitive decline, alzheimers disease, and other dementia. Since it is projected that one in every 200 people worldwide will have contracted the virus, this could have huge implications for additional growth in dementia numbers. Dementia care can have substantial financial ramifications of up to £500,000 for a sufferer, according to the Alzheimers Society. Recent research has also found that just 7% of over-55s have made specific care provision because of the difficulty in anticipating these needs. Ramping up the risks for individuals, once again, the March 2021 budget made no attempt to address care cost and funding issues. Then there may be future health issues for many people who haven’t been going to the doctors for non-covid-19 related issues during lockdowns. Consequently, some diseases will have gone over a year undiagnosed, and this could unfortunately be a driver for more clients with more advanced conditions requiring faster routes to IHT mitigation. Shifted perspectives The pandemic has focused the global population on not just our own protection from harm, but what happens after Covid-19, on a planet where climate and environment-related matters need to be urgently addressed. Those dragging their feet on integrating environmental, corporate and social responsibility into their offerings could find themselves left out in the cold, at a time when we’ve seen just how quickly real change can happen. In the estate planning arena, there is perhaps a greater opportunity for investment-related solutions to demonstrate to clients exactly what their money can do to drive positive outcomes beyond financial returns. Like insurance companies and trust service providers, investment managers have a duty of care to their staff and to uphold internal governance, but they are also in a position to respond directly to huge ESG concerns through the investments they make. In the BR world, to date, this has largely taken the form of renewable energy assets and we discuss this further later in this update.
impacts on demography
i
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- sarah hendy, blackfinch group
Business Relief has been a stalwart of the UK tax system for 45 years, and investment is more important than ever as we look to reboot our economy.
life expectancy from birth in the uk
Source: Statista
br developments
MARKET UPDATE / Br developments
There has been much speculation in the last few months around changes to IHT as part of government efforts to fill the Covid-19 shaped hole in the Treasury’s coffers, and reports pushing for wholesale overhaul of the IHT system pre-dating Covid-19. But firms like KPMG have stated that, “whilst there could be changes to IHT BR, we do expect this relief will continue to have an important role to play in terms of business succession and wealth transition going forwards.”
This is actually a continuation of the trend in growing numbers of income options, with an increase of 13 income options that took place between March 2019 and July 2020 (rising from 38% to 50% of the market*). This suggests that there has been increasing demand from investors for income options and that BR managers have access to routes of income delivery, which is perhaps not a surprise when we consider the energy companies among BR investees. They are often able to secure fixed fees for the energy they provide allowing them predictable income streams. Insurance options Since a high proportion of Covid-19 deaths have been in older age groups, it seems reasonable to suggest that BR managers may have seen an increase in the number of deaths among their investors. We might also assume that those managers who have an insurance feature (generally to insure against the investor not living the two years required to meet the BR minimum holding period qualification) as part of or an add-on to their BR offer, may have seen premiums rise. According to figures from the Association of British Insurers (ABI), the protection industry paid out £6.2 billion in claims in 2020, an 8% increase on 2019. Most of this £438 million increase is attributed to Life insurance claims, where there was a £349 million rise in payouts. However, there has been no impact on the number of BR offers with insurance options. Nine of the 65 open offers in April 2021 (of which 5 offer Life insurance); the same nine as in July 2020. However, none of the 6 BR offers that opened during that period included an insurance option. While it’s good to know that, within BR offers, there are still drivers to keep insurance options competitive, we don’t have figures on the uptake of insurance (it’s not compulsory to acquire it from the manager when making a BR investment), premium levels, or on the independent insurers outside BR offers. But, it’s clear that advisers do need to consider how this part of the BR market may have changed thanks to Covid-19 when weighing up the pros and cons.
Inflows That’s not to say that Covid-19 uncertainty hasn’t impacted BR, with MICAP data showing some drops in annualised returns in 2020/21. However, there are expectations of a speedy bounceback as conditions improve and pent up demand is released; as you’ll see later in this section, AIM recovered quickly from it’s Covid-19 lows and has made a strong start to the 2021/22 tax year with a better-than-expected Q1 2021/2. As a result, at the start of May, the Bank of England raised its estimate for UK GDP growth to 7.25% in 2021, up from February’s 5% forecast. This would equate to the strongest growth since the second world war. There is also evidence of strong opportunities in equity funding for smaller companies feeding healthy investment appetites in this area, and loading deal pipelines. According to the British Business Bank’s Small Business Finance Markets Report 2020/21, equity investment into private smaller companies rose by 9% on 2019 levels to £8.8 billion in 2020 and investment into established/growth stage companies (including those which are likely to be of most interest to BR investment managers), grew by 21% in the same period. Income options Widespread cash flow issues due to the temporary closures to many businesses during lockdown led to a notable drop in dividend payouts from AIM quoted companies during the height of Covid-19, and unlisted companies may well have experienced the same issues. In the immediate aftermath of the first lockdown, Link Asset Group data showed Q2 2020 dividends fell by a third on a year-on-year basis, and in September Link said it did not expect AIM dividends to fully recover until 2022 or 2023 at the earliest. So, it might be surprising to learn that, according to MICAP data, between July 2020 and April 2021, the number of open BR offers providing an income option increased by 4 to 37 (rising from 56% to 57% of the market*). What’s more, the majority of the increase came from AIM-focused BR offers, leaving the split between AIM and non-AIM focused BR offers with income options fairly even.
rise in equity investment to smaller private companies from 2019 to 2020
9%
9
*This includes offers in which growth is paid out as income or where there is a regular withdrawal facility (conditions may apply.)
AIM business relief
MARKET UPDATE / aim business relief
The number of IPOs on AIM has also held up well during Covid-19. AIM saw 20 IPOs in 2020/21, down only marginally from 23 a year earlier (excluding reverse takeovers). While IPO activity fell very sharply during the early stages of the pandemic, with only three new listings between January and May, it bounced back strongly with 10 new listings in the final three months of 2020. This will be pleasing to BR investment managers in this space as it offers new potential investees and shows that even in tough times, the market remains attractive to smaller, agile firms looking for funding. Even more optimistically, the first three months of 2021 saw a further 13 IPOs compared to three in the same period of 2019. For more in depth analysis of the AIM market, see our next AIM update, due for publication soon.
- Dan Hutson, Partner and Head of Audit, UHY Hacker London office
AIM is now a much more robust market than it was in the last recession – it has better companies, better regulation and a better orientation towards growing sectors like technology.
Jul 16
jan 17
Jul 17
jan 18
Jul 18
Jan 19
Jul 19
jan 20
Jul 20
Jan 21
1000
800
600
400
1200
FTSE AIM All-Share index
1,244.52
Source: London Stock Exchange, 14 April 2021
10
hile not all AIM quoted companies qualify for BR, and individual companies will have their own specific data points, the overall performance of the AIM market in the last year has been encouraging for BR managers and investors: In March 2021, UHY Hacker reported that the value of the junior market's all-share index grew by 22% in the year to January 31, compared with the year before. Meanwhile, the FTSE all-share index fell by 10% in the same period. While there were significant drops at the start of the Covid-19 crisis, the AIM All-Share market had recovered to surpass its year-to-date high of 975.18 recorded on 20 February by 8 October 2020.
budget news
MARKET UPDATE / BUDGET news
uch like the March 2020 budget, this year’s budget proved to be a bit of a damp squib in that many industry figures expected the announcement of big changes to match the colossal impact of Covid-19. Also mirroring the March 2020 budget, there were no changes to BR, but there were new measures that are likely to compound the Covid-19-related shifts to the landscape in which BR operates. Quite rightly, the government was keen to create conditions to allow all businesses to flourish, including a new Recovery Loan Scheme which will provide lenders with a guarantee of 80% on eligible loans between £25,000 and £10 million. But the main focus was on, ”an investment-led recovery." This is a process that BR investors and investment managers are well-placed to take part in. Other announcements could well increase the numbers of those who might consider BR as the potential for IHT liabilities grows: While the Chancellor did not increase IHT rates, by fixing the pensions lifetime allowance, nil rate band (NRB) and residence nil rate band (RNRB) allowances for five years, he paved the way for growing IHT receipts.
• The Pensions Lifetime Allowance will remain at the 2020/21 level of £1,073,100 until April 2026 instead of increasing by CPI annually over that period. • Inheritance tax Nil Rate Band (NRB) and Residence Nil Rate Band (RNRB) will remain at 2020/21 levels until April 2026. They were due to increase annually at the CPI rate.
These frozen allowances have been labeled ‘stealth taxes’ as, while inflation, wages and asset values grow, there will be no corresponding adjustments to the amounts that are exempt from taxation. Where pensions are concerned, the same factors will leave increasing numbers of high earners with no remaining pension lifetime allowance. Instead they are likely to require alternative, flexible tax-efficient savings and investment mechanisms for later life and legacies. Estate values are, of course, key to IHT liabilities. House price growth has been one of the major components in pushing up estate values and two 2021 budget measures in particular support the UK housing market: • The extension of Temporary Stamp Duty Land Tax (SDLT) until 30 June 2021. From 1 July 2021, the Nil Rate Band for SDLT will reduce to £250,000 until 30 September 2021 before returning to £125,000 on 1 October 2021. In April 2021, provisional data from HMRC shows that 147,050 sales went through in February, up 49% year-on-year. • The introduction of the Mortgage guarantee scheme. This will provide a guarantee to lenders across the UK who offer mortgages to people with a deposit of just 5% on homes with a value of up to £600,000. More mortgage availability translates to more buyers, which creates greater competition for properties and rising house prices. In March 2020, the Building Societies Association said the scheme was partially responsible for, “the highest positive sentiment level seen in its property tracker data series since March 2015.” These have combined to create a major stimulus. In fact, there are concerns that unless the supply of affordable housing is there to meet the increased demand, there’s a risk the scheme could inflate prices further. Some BR offers have exposure to property mainly through loans to property developers. As housing demand swells, there may be more demand for these loans as more developers enter the market and want property development loans, allowing the rates and investment returns to rise. Those who expect the RNRB to offset the IHT payable on climbing house price growth may have a rude awakening - not only because of its frozen allowances: In 2017-18, 20,200 estates used the RNRB threshold (£100,000 per eligible individual at that time), and £3.1 billion of chargeable estate value was sheltered from an IHT charge as a result. HMRC said in its 2020 IHT statistics that, "Due to the usual long periods of time between the tax charge being created and HMRC receiving the tax payment, the effect on receipts from the RNRB’s introduction is felt in 2019-20." But the drop in IHT receipts that filtered through to 2019/20 was just £200 million, suggesting that RNRB was already lagging behind house price inflation at its inception. The Office for National Statistics (ONS) reported that UK average house prices increased by 8.5% over the year to December 2020 and according to Savills in March 2021, the average property price is set to increase by 4% in 2021.
Published alongside Mr Sunak’s March 2021 budget was the Office for Budget Responsibility’s latest Economic and Fiscal Outlook. Among other things, the March 2021 iteration takes into account the new measures announced in the budget to boost the UK economy and the impact of the freezing of the pensions lifetime allowance, NRB and RNRB thresholds and allowances for the next five years. These projections expect that, even in 2022/23 and 2023/24, when IHT receipts are forecast to dip, the receipts will be 7% and 6% respectively above the current record year of 2018/19 when IHT receipts reached £5.4bn. By 2025/26 £6.6bn in IHT receipts is expected to be collected.
Response to OTS IHT Review first report In March 2021, the government published “a series of tax documents and consultations in a move to strengthen policymaking and help create a more trusted, simple and modern tax system.” On this 'Tax Day', there were here were no indications of a review of CGT or pensions tax reliefs as had been widely suspected in the press. However, in the documents the government did provide its response to the Office of Tax Simplification’s first report on Inheritance Tax, published in November 2018 and largely forgotten. The first report’s recommendations pertain to simplifying the administration of IHT through the amendment of reporting requirements and digitisation. This included removing the need to report to HMRC when applying for probate for over 90% of estates that have no IHT to pay, as well as a review of the government's IHT guidance in order to reduce worry of those who do not have to pay IHT, and help those that do to establish this fact quickly and easily. The government also said it would consider the OTS’ recommendation to implement a fully digital system for IHT, ideally including the ability to complete and submit a probate application online. It said it would need to balance the other short and long-term priorities as part of its digital transformation of taxes agenda, however. But it is the second OTS report into IHT, published in July 2019, exploring the main complexities and technical issues that arise from the way the tax works, where changes much more impactful to BR managers and investors could take place. Take a look at the ‘What’s on the horizon’ section of this update for a reminder of the recommendations of the second report which now appear to be back up for discussion.
Increasing tax planning pressures The Tax day documents included more measures intended to clamp down on promoters of tax avoidance and raising standards in the tax advice market. In the documents, it was stated that, “The government is committed to clamping down on deliberate noncompliance, as well as supporting taxpayers to get their tax right first time.” Consultations are running on both topics until June 1 and June 15 respectively. This is an ongoing campaign and again suggests that the government-backed status of BR is likely to provide even more comfort to those searching for legitimate tax planning methods.
- Tax policies and consultations Spring 2021, Presented to Parliament by the Financial Secretary to the Treasury
At present the tax gap stands at a record low of 4.7%. But there is scope to reduce it still further, for example by removing sources of error, and by more work to tackle tax avoidance, evasion and other forms of non-compliance.
M
changes to allowances
Y-on-Y increase in house sales (February 2021)
49%
iht projections
office for budget responsibility iht projections (march 2021)
2021/22
2022/23
£5.8bn
2023/24
£5.7bn
2024/25
£6.1bn
2025/26
£6.6bn
£6.0bn
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- Tom Mullard, Downing
The BR market has held up well over the pandemic, with initial losses weaker than in other sectors supported by the capital preservation nature of the investments and in some cases protected with downside insurance products. Funds are now showing good growth as the economy reopens.
• NRB has not been increased for over a decade. The NRB continues at £325,000 per person • The RNRB will continue at £175,000 per person. The RNRB taper will continue to start at £2 million. Qualifying estates can continue to pass on up to £500,000 and the qualifying estate of a surviving spouse or civil partner can continue to pass on up to £1 million without an inheritance tax liability.
tom mullard
thought leadership
The importance of a wider perspective in Estate Planning
MARKET UPDATE / THOUGHT LEADERSHIP
T
here has been a lot of content produced about the rise over the next 25 years in the already high levels of wealth transferring through the generations. According to the King’s Court Trust, annual intergenerational wealth transfers will increase from £69 billion in 2017 to £115 billion in 2027, with a total of £5.5 trillion changing hands in the UK between 2015 and 2045, making estate planning a potentially very lucrative area for advisers to be engaged in. Apart from the importance this places on good estate planning advice, it also presents a number of considerations and opportunities for advisers around the retention of clients and assets under management once the funds have passed to the next generation. The follow-up report from the King’s Court Trust found that 15% of IFAs reported losing more than 50% of the value of assets under management that have been through intergenerational transfers in the last financial year, with 34% reporting losing 20% or more. 25% of IFAs reported that one of the reasons beneficiaries chose to take business elsewhere was the lack of a relationship with the deceased’s IFA. Family loyalty is often less important to the younger generation than historically has been the case. They are more concerned about price and service and are happy to shop around to get the best deal, as they would for a mobile phone or electricity contract. Considerations such as digital access and delivery methods of advice may also now be a differentiator, so ensuring you and your practice are getting up to speed will be important. One way to combat the lack of a relationship with the younger generation could be to engage with the beneficiaries of the estate during the planning process. This can make any transition after death smoother and enable you to demonstrate the value-add that a good financial adviser can offer. Establishing communication links at this point can help build solid relationships and develop an appreciation of the objectives and benefits of the planning process for all parties. It also more easily facilitates any assistance needed during the probate period, again promoting the value of the relationship. Another reason to engage with the next generation earlier is the opportunity to understand what the drivers behind their own investment approach might be, post inheritance. For example, impact investing, sustainability and clean energy investing are all areas that are generally valued much more highly by millennials than previous generations (albeit they are growing in importance across all age demographics). Alternatively, it could be that the beneficiaries may have no interest in investing at all, but you may find that ESG and impact investing are more engaging for them, giving you the chance to retain funds under management that may have otherwise been withdrawn. For those future potential clients that are keen to continue investing their funds, the greater ease of carrying out research online, compared to previous generations, means that specific investment advice may now be of less perceived value. Being able to demonstrate the value of more complex planning solutions with a thought through and well researched investment strategy suited to their family circumstances could be the hook that retains those funds in the future. In summary, as the wealth of the baby boomer generation gets passed on, those advisers that are able to properly engage with the next generation and offer more than just basic estate planning for clients are most likely to reap the rewards in the long term.
Another reason to engage with the next generation earlier is the opportunity to understand what the drivers behind their own investment approach might be, post inheritance
director, product development and strategy downing
downing.co.uk +44 (0) 20 7630 3319 sales@downing.co.uk
contact
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henny dovland
The growing need for Inheritance Tax planning
t is a popular misconception that only the very wealthy will have an exposure to Inheritance Tax (IHT). Increasingly, more and more families are finding that their estates are over the IHT threshold and liable to the hefty 40% tax. This misconception means that IHT is frequently misunderstood or ignored. Our nationwide consumer study revealed that 52% of over-55s do not know what their IHT liability is. Indeed, 31% of over-55s revealed they have never even checked the rules on IHT and how it applies to them personally. IHT receipts have increased substantially over the last decade and hit £5.2 billion for the last tax year (2019/20). This trend is set to continue with the Chancellor announcing a freeze to the tax-free allowances. Both the Nil Rate Band (NRB) and Residence Nil Rate Band (RNRB) are fixed at £325,000 and £175,000 respectively until April 2026, these had both been expected to rise in line with inflation from 6 April 2021. The freezing of these allowances may push some clients' estates over the threshold and into paying IHT, particularly considering rising house prices and investment growth. IHT is often called the “voluntary” tax as, with careful planning, there are many simple and legitimate ways to reduce an exposure to this tax. This is a growing area of planning and our adviser research revealed that 72% of financial advisers expect to see a rise in the number of retail investors looking for help with IHT planning, with 26% expecting a dramatic increase. There are many planning routes to help clients reduce their IHT liabilities, all with their own constraints and considerations. The easiest route may be gifting to a family member; however, larger gifts will typically take seven years to fully fall outside of the taxable estate. Another option is to set up a trust which is exempt from IHT; however, as with gifting, this can take seven years to be fully exempt and once the assets are in the trust, the individual loses control. An alternative tax efficient option is investing in shares that qualify for Business Relief (BR) and holding them for more than two years. Once BR shares have been owned for at least two years they can be passed on free from IHT. Investments are usually made in the client’s name, so they maintain access to capital, subject to liquidity, should it be needed in the future. The first step is often to assess whether clients have an IHT liability before discussing what the best planning options may be for them. TIME Investments offers a range of resources and support to help open up conversations with clients around estate planning, particularly how clients can take steps to reduce their IHT liability. TIME has created a simple online calculator to help you forecast your clients’ potential future IHT liabilities by inputting the current values and projected growth rates of property, investments, and cash. You can then select the available NRB/RNRB allowances, which have been updated to reflect the freeze. The calculator can also help you illustrate the potential tax savings that a BR qualifying investment can make on reducing an IHT liability. You can access the online calculator at: IHTcalculator.com
IHT is frequently misunderstood or ignored. Our nationwide consumer study revealed that 52% of over-55s do not know what their IHT liability is.
business development director time investments
time-investments.com 020 7391 4747 questions@time-investments.com
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1. Consumer research conducted by Consumer Intelligence among 1019 individuals, 19-21 February 2021. 2. Consumer research conducted by Consumer Intelligence among 1019 individuals, 19-21 February 2021. 3. Table 12.1 Inheritance tax: analysis of receipts’, HMRC, July 2020. 4. Adviser research conducted by PureProfile among 50 UK-based professional financial advisers and wealth managers during February 2021.
what the managers say
How have the past 12 months been for your BR investees?
The lending companies have largely performed in line with expectation over the last 12 months. The solar companies have operationally performed to budget and continue to perform well; however, the uncertainty of the last 12 months has increased volatility in inflationary and power forecasts which has a mixed impact on the valuations, which are based on expected future cash flows. The overall picture has generally been one of stability which is to be expected given the generally lower risk trading strategies across all four companies.
Given the volatility we’ve seen over recent months, have you had to make any changes operationally? (e.g. with regards to valuations or investment pipeline)
At present, UK power prices are at a 5+ year high and this is allowing the businesses to lock in power prices for 2022 at above current forecast prices. Furthermore, the expected higher forecast inflation should have limited impact on the performance of the solar business given that most of the revenues are RPI linked thereby providing investors protection against higher inflation. The pipeline of new opportunities is likely to be enhanced as a result of recent uncertainty as businesses start to seek alternative funding/financing arrangements – this will be true across lending and commercial solar sectors. Higher inflation may give rise to higher interest rates which may result in increased lending opportunities for the EPS lending businesses whose typical lending terms will become comparatively more competitive.
Have you seen an increased interest in ESG focused investment? How have you reacted if so?
ESG is a significant focus for Beringea and the companies that we invest in. We see a clear commercial benefit to investing in sustainable, diverse businesses that embrace good governance practices. We have, therefore, implemented our own ESG policy and strategy in recent months. This involves providing companies in the portfolios of our funds with the resources to measure and improve their ESG performance. Beringea is leading an industry initiative with more than 50 early-stage investors to develop these resources, and it was also recently nominated as the Diversity and Inclusion Leader of the Year in the VC category at the Private Equity Awards.
mark taylor
Partner Beringea
Our advisers and clients seem very happy with the fact that our inflows continue to far outweigh our outflows, that we did not need to gate our funds, provided liquidity within ten calendar days on average, and that our funds were not impacted by the stock market falls, proving our portfolio returns are not correlated to the stock market.
Given the volatility we’ve seen over recent months, have you had to make any changes operationally? (e.g. with regards to valuations or investment pipeline).
Our portfolio companies responded extremely well to the events of 2020. Faced with a crisis of unknown scale and duration, they continued to innovate, whether with creative cost reductions, flexibility in meeting customers’ changed needs, or even whole new products. It was a true test of entrepreneurial mettle, and it demonstrated that those start-ups with the ability to disrupt old practices and meet changing circumstances are best-positioned for long-term success.
We are fully committed to ESG across all areas of our business, and have produced a number of supporting documents and presentations for advisers. The pandemic has increased investor awareness of the importance of sustainability, and we are seeing this reflected in the number of advisers asking for support, or for investments with an ESG focus.
Dominique Butters
Executive Business Development Manager Blackfinch
Both companies within the Downing Estate Planning Service have delivered four consecutive quarters of growth through to March 2021, with their share prices increasing between 3.8% and 4.1% in the 12 months to 31 March 2021. In terms of the energy & infrastructure strategy, the importance of renewable energy to the UK’s infrastructure continues to dominate headlines, reinforcing our view that this remains an attractive long-term investment area. Similarly, the asset-backed strategy has seen strong resilience in the key sectors we focus on.
We continue to take a proactive approach to portfolio management, working closely with management teams of the underlying businesses within our BR portfolio. At the start of the pandemic, a greater proportion of portfolio management time was spent on the operational performance of the existing portfolio to ensure everything was being done to protect shareholder value. As the economy has improved, we are considering an increasing number of opportunities as we seek to add attractive new holdings to the portfolio.
We are beginning to see an increased interest in ESG focused investment. We are fully committed to ESG and responsible investing, and have been working to improve our processes as a business to support that. We are signatories of the Principles for Responsible Investment and each sector within our investment department has a tailored ESG tool they use to assess new opportunities against a set of criteria relevant to their sector.
Director, Product Development and Strategy Downing
The Octopus Inheritance Tax Service strategy is to invest into companies that have diverse, predictable and long-term revenue streams, uncorrelated from listed markets, which are expected to perform consistently across market cycles. Encouragingly but also to be expected, portfolio companies within the inheritance tax service have operationally performed in line with target throughout the pandemic.
No, no material changes. The Octopus Inheritance Tax Service investment strategy is to select companies that carry out trades in sectors which have predictable and long-term revenue streams, such as renewable energy generation and fibre infrastructure. As a result, valuations in these sectors are generally stable throughout all market conditions and cycles (but do move within an accepted range like all businesses). Operating in these specific sectors makes originating pipeline and forecasting deployment fairly predictable, allowing cash levels to be kept to a minimum, avoiding cash drag.
There is an increasing amount of interest in both ESG and responsible investing from both investors and advisers. However there is currently little consistency in approach or narrative and is unlikely to be until further regulation is enacted and guidance provided. In addition to the ESG policies we have in place that govern how we make investment decisions, Octopus has been accredited as a B Corp. This means our social and environmental performance, accountability and transparency have been assessed and certified.
jessiCa franks
Head of Tax Octopus Investments
SSL entered the current period of Covid-19 related economic challenge in good health resulting from strong trading performance over the prior 4 years. We are very happy to have generated another on target return of 4% for the year to March 2021, representing the fourth consecutive year of on or above target performance.
Given the volatility we have seen over recent months, have you had to make any changes operationally? (e.g., with regards to valuations or investment pipeline)
At the onset of Covid-19 we undertook a full review of our loan book to identify potential areas of stress and also increased the monitoring of our existing loans. Whilst we have always adopted a risk averse approach to new loans made from funds invested in our IHT service, we tightened our lending procedures during the last 12 months to ensure that our underwriting process took account of all potential impacts of Covid-19. Our on target performance is testament to our robust lending policies.
Yes, there is no doubt that investors are now becoming more discerning about the type of projects into which their capital is deployed and the ESG component is becoming ever more important. We have a significant and increasing ESG exposure in our lending portfolio in the form of Social Housing assets. These houses are typically used by local authorities and similar government bodies to provide accommodation to a variety of vulnerable individuals or those with care requirements. Up to March 2021, we had funded a total 170 social housing assets. These social housing assets not only benefit from very attractive ESG credentials but are also an attractive asset class against which we can lend given the “bricks and mortar” security available which is further supplemented by government backed rents.
chris hood
Sales Director, Tax-advantaged investments Seneca
TIME:Advance invests in a diversified portfolio of BR assets and has delivered performance within its target range of 3% - 4.5% p.a. Performance has been in line with our expectations throughout the period, with no loan impairments or decrease in the carrying value of our trading assets.
We have always had a very conservative investment strategy for TIME:Advance and we seek high-quality assets and aim to avoid the use of long-term debt or gearing. Most of our assets are long-term, cash flow driven and asset-backed, meaning they are not exposed to the same forces that led to volatility across global markets. We have continued to be highly selective in choosing which assets to invest in and we have had a healthy pipeline of investment opportunities throughout the period.
TIME:Advance has always invested heavily in renewable energy assets, with investments across solar, wind, hydro and biomass. We were also the first BR manager to invest in commercial forestry and we manage over 13,000 acres of FSC certified forests. Over the last year we have seen increasing interest from advisers and investors alike about how their investments can have a positive impact on the world. We have created an ‘Impact Investment Report’ to easily demonstrate to clients the positive impact an investment in TIME:Advance can have, including the clean energy generation and carbon offsetting potential.
stephen daniels
Head of Investments TIME Investments
MARKET UPDATE / WHAT THE MANAGERS SAY
14
So how are the managers feeling about the BR market and overall investment market conditions? Here's what they have to say.
3. Considerations for Investment
market composition fees and charges esg in br the cost of br
15
market composition
CONSIDERATIONS FOR INVESTMENT / MARKET COMPOSITION
In this section, we analyse 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 14 May 2021.
Target returns In May 2021, the average target return for BR offers focusing on private companies, rather than AIM quoted investees, was 3.88%. Disclosure of a target return is much rarer among AIM-focused BR offers, partly because they are subject to market sentiment, which is somewhat beyond their control, in a way that private companies are not. Since only four of the AIM BR offers published a target return in May 2021, the following analysis on target returns focuses on non-AIM Business Relief offers, where performance data can be more reliably mapped and cross-referenced with each other. More recent target returns indicate the ongoing impact of Covid-19 uncertainty. While non-AIM managers were not subject to the market sentiment that created such big lows in the early weeks of Covid-19 in the UK, they were not immune to cash flow issues while businesses were shut down due to lockdowns and have also lacked the fast funding mechanism provided by AIM. We have noted that some managers with higher target returns have now dropped them and that some have introduced targets that sit within a range without lowering the upper target, and sometimes, even increasing it. This suggests that, while these managers see less certainty, there is optimism about conditions allowing for outperformance.
All data has been obtained from the MICAP platform, unless otherwise stated. MICAP offers IFAs and other financial professionals a platform to conduct due diligence on tax advantaged funds, of which there were 65 focused on Business Relief at the time of writing.
sectors of underlying assets
Annualised returns Given Covid-19 difficulties, a downward trend over the last year is not a surprise, although, under the circumstance, the general performance is still fairly robust. Considering three of the four major underlying investment sectors for non-AIM BR managers - renewable energy, property and secured lending, there are some clear reasons for blows to performance: • Long term energy prices dipped in 2020 as Covid-19 shut down factories and other businesses, impacting demand • Property developments were interrupted by the first lockdown and then supply chain issues • The government’s Covid-19 related loan schemes dominated the lending market with terms difficult for any other lenders to match. The good news is that long term energy prices have recovered as industry has reopened and demand has risen, the property market is buoyant with government stimulus and less Covid-19 disruption as vaccination programmes continue apace and we head towards normality and the government loan schemes wind down. Some BR managers may well be expecting the performance of their offers to catch up with and possibly exceed targets in the near future, following general economic conditions. According to the Bank of England’s May 2021 Monetary Policy Report, even though UK GDP is expected to have fallen by around 1½% in 2021 Q1, “GDP is expected to recover strongly to pre-Covid-19 levels over the remainder of this year in the absence of most restrictions on domestic economic activity.
- Bank of England Monetary Policy Report, May 2021
New Covid cases in the United Kingdom have continued to fall, the vaccination programme is proceeding apace, and restrictions on economic activity are easing. Reflecting these developments, GDP is expected to rise sharply in 2021 Q2.
AIM vs Non AIM The number of BR offers that invest in AIM quoted companies has once again pulled ahead of those that invest in private companies. There has been no reduction in the latter, but the prospects of an AIM market continuing to show robust growth may well have been a strong driver here.
4.31% 4.14% 3.88%
jan 2020 jul 2020 may 2021
Average Target Return
44%
energy
media
sme lending
property
29%
general enterprise
7%
As is the norm, all AIM-focused BR managers keep their field of potential investment sectors wide with a General Enterprise strategy. Since their investment universe is already limited by the number of companies quoted on AIM, this is sensible. In contrast, in non-AIM BR offers, data for May 2021 showed that just one had a General Enterprise strategy, with another focusing on a range of asset-backed trading activities include bridging finance, farming, forestry, hotels, renewable energy and commercial & residential development. Within this mix the other main areas of investment for current BR managers are represented; energy, property and secured lending (this features heavily in both the property and SME lending sectors). Each of these is currently subject to significant interest and benefits from some strong drivers. Energy is by far the most popular investment sector, with the vast majority honing in on renewable energy. 44% of open offers make this their main area of focus and a number of others including it in their possible buy lists. Covid-19 has placed a spotlight on global issues that threaten us all and the UK government’s action on climate change has incentivised accelerated growth in fields that can help it reach its net-zero target for carbon emissions by 2050. (See the next article in this update, ‘ESG in BR’ for more on this). We’ve already discussed the current property market boom in the first section of this update and the asset backed nature of property assets has always made it an interesting option for BR investment managers. In general terms, all corporate lending has been hit since the introduction of huge government schemes to support firms through Covid-19 lockdowns. The low cost and terms of these schemes to the borrower has meant they have dominated the lending landscape. However, the British Business Bank said in its Small Business Finance Markets 2020/21 report, that, “SME finance providers remain well placed to service demand for finance...as demand for their products returns to more normal levels and government guarantee schemes become less dominant in the market. Though they tend to look for companies with a minimum market cap, a suitable level of liquidity and avoid companies such as pharmaceuticals and mining that can have large swings in valuations.
At 14 May 2021, there were 65 open Business Relief offers. This is an increase of three since July 2020.But the November 2020 amalgamation of four offers of one provider into a single offer, means that six new offers have actually opened in the period of July 2020 to May 2021. That’s an increase of over 10%, likely an indicator of the confidence of BR managers in the current opportunities in the BR investment landscape.
march 2020* 3.77% 0.95% 6.84%
july 2020** 3.52% 0.73% 5.90%
avg min max
Average Annualised Return Since Inception
may 2021*** 3.26% 0.64% 5.22%
march 30 2020* 29 27
july 1 2020** 31 31
may 2021*** 34 31
current aim offers current non-aim offers
How do we use MICAP?
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*Data from 17 of the 28 non-AIM offers for which there was data at 30 March 2020 **Data from 22 of the 31 non-AIM offers for which there was data at July 2020 ***Data from 22 of the 31 non-AIM offers for which there was data at 13 May 2021
fees and charges
CONSIDERATIONS FOR INVESTMENT / FEES AND CHARGES
Initial Charges Initial charges have remained virtually unchanged since July 2020, suggesting that there have been no attempts to disrupt pricing models in this period. There is, of course, a range of total initial charges from 0% to 7%, which, depending on the investment amount, is a fairly significant amount on which tax relief will not be available as it is not invested into BR qualifying companies. One thing to remember is that there are managers that do not charge an initial charge, but do have an initial deal fee for the acquisition of the shares in the underlying companies. For May 2021, this pushes up the average upfront charge to 1.7%. There is a marked difference between the average initial charges, with private company BR offers applying them at a rate over five times higher than AIM BR offers. Fees payable by investors account for almost two thirds of the total and the initial charge to investee companies alone is almost double the total average initial charge paid by investors into AIM BR offers. This may reflect additional work required by private company BR investment managers to source investees that are not in the AIM ‘shop window’. But also, it’s worth noting that costs to list on AIM, although cheaper than listing on the main markets, may still be up to 10% of the capital raised (Sykes Anderson Perry). This includes the fees of the professional service providers required as part of the listing process, most notably NOMADs.
Data provided by MICAP
deep dive into fees and charges
Annual Management Charges Again, there are managers that do not charge an annual management charge (AMC), but do have ongoing trading costs when there is divestment and reinvestment. For May 2021, this pushes up the average annual charge to 1.61%. It is a good idea to look at trading costs and the expected level of trading, bearing in mind the number of trades is unlikely to be high in a BR portfolio but varies between offers. The amount payable by investee companies continues to creep up, but the overall Annual Management Charge has dropped marginally. As with Initial Charges, there is welcome stability here, as well as the consideration that BR managers have settled on fee levels that they feel will now cover their costs in stock picking and investee support, now that routes out of Covid-19 lockdowns seem more assured. Both Initial charges and annual management charges can be used to cover operational costs by the managers. It is worth checking the published additional manager operating costs that apply and whether they are capped. Advisers should also be aware that some managers only charge an AMC when the target return has been met on non-AIM offers. If we look at the AMCs across AIM and non-AIM BR offers, as for Initial charges, we can see that, as AIM quoted firms will not be paying any annual fees to the BR managers, the investor shoulders the entire burden of these fees and this kind of recurring fee should be part of the overall considerations when comparing AIM and non-AIM BR offers.
performance fee
annual performance fee
20%
annual performance hurdle
15%
30%
4%
5%
4.5%
br offer 1
br offer 2
br offer 3
br offer 4
br offer 5
july 2020 1.00% 0.35% 1.33%
may 2021 1.02% 0.33% 1.32%
to investor to investee total initial charge
average initial charges
to investee 0% 0% 0%
total 0% 2.5% 0.41%
aim min max avg
aim vs non-aim
to investor 0% 2.50% 0.44%
to investee 0% 7% 0.77%
to investor 0% 2.50% 1.41%
total 0% 7% 2.18%
non-aim min max avg
to investor 0.8% 2% 1.30%
total 0.8% 2% 1.30%
to investee 0% 2% 0.92%
to investor 0% 1.5% 0.42%
total 0% 2.5% 1.28%
jul 2020 0.92% 0.36% 1.27%
may 2021 0.91% 0.38% 1.26%
to investor to investee total AMC
average annual management charges
2019 0.98% 0.32% 1.26%
mar 2020 0.92% 0.31% 1.18%
While there is little difference in the overall average AMCs, for private company BR investments, the investees are expected meet two thirds of these costs. There still may be a concern for investors here as this type of annual cost could weigh down on the companies they are investing in. Having said that, it’s worth remembering that private companies do not have the annual costs associated with being quoted on AIM. These can be from just over £13,000 as a minimum, reaching a maximum of £220,500, depending on the size of the company.
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If we add the initial deal fee, the average total upfront charge is 0.84%
If we add in the initial deal fee, the average total upfront chage is 2.77%
esg in br
considerations for investment / esg in br
The growing popularity of considering environmental, social and governance (ESG) has converged with BR managers’ interest in sustainable investments.
Typically, these take the form of renewable energy investments, which provide a relatively stable, predictable return for investors – something suitable for many BR investors who are looking for a way of preserving their wealth while helping loved ones avoid a stinging inheritance tax bill at a later date. The investors are entering a growing field. The UK has legally committed itself to being carbon neutral by 2050 and, in order for this to be achieved, the UK is going to have to invest heavily in improving its renewable energy sources. Although the past decade has seen the use of coal in British electricity production rapidly reduce, natural gasses remain the largest net contributor to the national grid.
electricity generation mix
The Society of Motor Manufacturers and Traders estimates that battery and plug-in hybrids will make up 1 in 7 new car sales in 2021, compared to 1 in 10 in 2020. With an ever-increasing portion of the UK fleet using electricity, it’s likely UK electricity demands will increase – creating more demand for renewable energy. The government is supportive of the transition to renewable energy sources, and the recent budget included a number of measures to encourage investments in the field (See Carbon Neutral Economy in the next section of this Update) This once in a lifetime shift to new forms of electricity generation, has attracted a number of BR investment managers who now invest in renewable energy strategies with long term drivers and demand. Analysis of MICAP data shows just over 60% of the 31 BR funds focusing on private companies, open at the start of April, included at least some form of investments into renewable energy companies in their list of targets. It is important to note that the majority of companies offering investments that would classify as ‘ESG’ also invest in other sectors – for example into property, SME lending or some form of media. For clients wishing to focus investment made as part of their IHT planning on ESG focussed funds, it is therefore important to carry out the proper due diligence to understand what percentage of their funds are typically invested along ESG lines, and what that particular investment pipeline is looking like.
funds investing in esg companies
What do BR funds typically invest in?
Wind turbines can generally be split into onshore and offshore turbines. Although wind is less reliable than other forms of energy generation (such as the sun), it remains a key part of the UK’s energy strategy, and in 2020 generated almost a quarter of UK electricity (24.8%), second only to Gas (34.5%) in terms of importance.
While the UK’s famously cloudy and unpredictable weather might dampen some of the expectations, Solar remains a key part of the UK’s energy generation strategy. Between 2010 and 2019, renewable sources producing up to 5MW power received a feed in tariff for 20 years (25 for solar), effectively offering a return guaranteed by the UK government. This resulted in a Solar building spree, which has slowed dramatically in private property since the tariff was closed to new applications.
SOLAR
wind
While much focus is spent generating electricity, one of the key challenges not yet solved is how to effectively store it. This is creating opportunities for companies looking to develop battery tech or other, novel solutions.
Battery/carbon capture
Looking for returns While investing in assets designed to make the world a better place for the next generation might be an appealing prospect for investors considering their legacy, it is also important to note that these investments can also provide an attractive return, although not of the same order as ESG funds on listed markets. Having said that, the 40% IHT saving BR investments can bring is a substantial financial gain. Renewable energy assets are generally uncorrelated to other assets, and can therefore be a great way to diversify a portfolio in a tax efficient manner.
Source: BEIS Energy trends section 5: Electricity (ET 5.1). Information correct as of January 2021
Coal Oil Gas Nuclear Hydro (natural flow) Wind and Solar Bioenergy Pumped storage (net supply) Other fuels Net imports (interconnectors)
yes
61.3%
no
38.7%
Source: MICAP
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Humans have been harnessing natural water flows to generate power for millennia. While it has historically been used for water wheels to grind a product, now it is increasingly used to generate electricity. Whereas solar or wind power can be built almost anywhere, at low cost, hydro power requires a suitable water source, and can have adverse environmental effects if due care isn’t taken.
hydro
the cost of br
INDUSTRY ANALYSIS / the cost of br
HMRC statistics from October 2020 show that in 2019/20, the cost of Business Relief as a share of GDP was just 0.04% or £815 million. This is the same as gifts to charities and property held on trust for charitable purposes and substantially less than the 0.17% cost of GDP of the spouse/civil partner exemption.
n fact, of the 34 HMRC-costed tax reliefs, only seven cost less than BR. They are: film tax relief, the Enterprise Investment Scheme (EIS), the marriage allowance, the personal savings allowance, Employer Supported Childcare including workplace nurseries, Relief on employer National Insurance Contributions for employees under 21 and first time buyers relief.
Business Asset Disposal Relief (formerly Entrepreneurs Relief), which can be used in conjunction with BR, came with a much higher price tag, before the March 2020 changes that saw its lifetime limit reduced from £10 million to £1 million. In 2019/20, it cost £2.7billion or 0.12% of GDP.
Business Asset Disposal Relief and Business Relief (BADR)
BADR is a CGT relief which applies a tax rate of 10% to gains accruing on the disposal of all or part of a business, which includes ordinary shares in an unlisted trading company. Depending on the trade undertaken by the company, those who qualify for BADR may also be able to use BR to reduce their CGT and IHT tax liabilities when exiting the company. BADR would reduce any CGT bill by half to 10%. In addition, assuming the shares in the company had been held for at least two years and the trade was BR-qualifying, if proceeds of sale were used to acquire ‘replacement’ BR-qualifying shares within three years of the disposal of the original shares, the new shares would immediately become zero rated for IHT, if claimed.
The upshot is that BR is a relatively cheap tax relief, with an important function in terms of driving investment to SMEs and AIM-quoted companies. Consequently, it may well be under the radar of those in government looking to make savings to reduce the current deficit.
Source: HMRC, Estimated Cost of Tax Reliefs, 30th October 2020
Nominal Annual Cost (£m)
Cost as a share of GPD (%)
cost of business relief
of GDP - cost of BR
19
- jessica franks, octopus investments
The patient capital invested through BR focused products provides fantastic support to the UK economy, while offering flexible, quality solutions to investors.
0.00%
0.01%
0.02%
0.03%
4. Industry analysis
carbon neutral economy offers opportunity spring budget driving economy Reframing excepted cash assets
20
carbon neutral economy offers opportunity
INDUSTRY ANALYSIS / carbon neutral economy offers opportunity
A number of Non-AIM BR funds include renewable energy companies as targets to invest in. Such investments also fit well into the government's current Carbon Neutral strategy.
here has been an ongoing government effort to reduce the UK’s environmental impact, including the 2008 Climate Change Act, which was updated in 2019 to commit the UK to net zero emissions by 2050. Since 1990, UK greenhouse gas emissions have reduced over 40%, however there is still a long way to go. The past 10 years have seen the price of renewable energy plummet, to the point where it is now cheaper than fossil fuels on a per kWh basis. Despite falling energy prices, increased use of green energy, and governmental encouragement, the UK remains tied to fossil fuel. To outline how it intends to reach its 2050 target, at the end of 2020 the government released it’s 10 point plan to achieve it’s net neutrality.
UK Government’s 10 Point plan for a green revolution
Advancing Offshore Wind Driving the Growth of Low Carbon Hydrogen Delivering New and Advanced Nuclear Power Accelerating the Shift to Zero Emission Vehicles Green Public Transport, Cycling and Walking Net Zero and Green Ships Greener Buildings Investing in Carbon Capture, Usage and storage Protecting our Natural Environment Green Finance and Innovation
Source: The Ten Point Plan for a Green Industrial Revolution, Nov 2020, gov.uk
For fund managers, this offers a rare opportunity to invest in a growing field that investors feel good investing in that is also being encouraged by the government.
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falling costs of renewable energy
Source: IRENA (2020) Renewable Power Generation Costs in 2019
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- simon housden, time investments
Inheritance Tax is a growing issue for many families and even during the pandemic many advisers have recognised that delaying a BR investment only delays the BR qualification period.
spring budget driving green economy
INDUSTRY ANALYSIS / spring budget driving green economy
In March 2021, UK Chancellor Rishi Sunak unveiled his Spring Budget, outlining his vision for an investment-led recovery.
n March 2021, UK Chancellor Rishi Sunak unveiled his Spring Budget, outlining his vision for an investment-led recovery. This included a new Infrastructure Bank (IB), equipped with billions of pounds to invest in public and private enterprises to redress regional imbalances and encourage ESG investments. The full details of the bank are yet to be released, so it is currently impossible to know the effect it will have, however from it’s Policy Design Document, a few points are notable:
Taking the floating offshore wind technology programme, this will be offering a number of £2-10 million grants to projects that can demonstrate and trial and innovative technologies and processes. The target will be offshore wind turbines in deeper waters, as the government seeks to increase the amount of the UK’s seas available to generate electricity. As this is not for systems which are already at the commercial design stage or beyond, there will be competition from companies in more early stages than those BR funds typically invest in. That said, applicants need to demonstrate they have in place private funding to cover the balance of the eligible costs, meaning some companies BR funds typically look at might be able to access these grants and reduce the risks on their R&D. In addition, many investment managers monitor new companies in this sector, waiting until the technologies are somewhat proven before investing. If this grant helps smaller companies in progressing through this earlier stage more successfully, or quicker, it should increase the options for fund managers. Separately, the government has provided £30 million to a number of companies in the battery supply chain, as the UK seeks to ensure its place in the future of electric vehicles. One such company, Cornish Lithium - a mining company looking to exploit lithium deposits in Cornwall - received advanced assurance for EIS. This means it is also likely to be eligible for BR. All this demonstrates the government is still willing to invest in ESG type projects, despite the current deficit and Covid-19 related economic difficulties. It also shows that it is not averse to these companies and their investors then benefitting from tax efficient investing mechanisms that incentivise the investors with tax reliefs. For fund managers and investors, this ought to provide confidence when investing in the sector. With the government continuing to offer grants and loans for ESG projects, and renewables becoming increasingly popular, it seems likely the number of renewable energy or ESG non AIM BR funds will continue to increase.
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• The bank will aim to work in partnership with private and public sector institutions to finance projects. • It will target ESG projects • It will prioritise investments where there is an undersupply of private finance • This is part of the government’s answer to the end of the European Investment Bank (EIB), which UK SMEs lost access to as a result of Brexit.
As well as the IB, the government also announced a number of new funding options for green UK Companies, including a £20 million programme to support the development of floating offshore wind technology across the UK; the launch of a new £68 million UK-wide competition to implement several first-of-a-kind energy storage prototypes or technology demonstrators; a £4 million UK-wide competition for the first phase of a biomass feedstocks programme.
potential future subsidies?
As the UK has now left the EU, the government has taken on additional responsibilities around state aid. Although as part of the EU-UK trade deal, it has to remain within a number of principles, the government now has additional freedom to manoeuvre in this field than previously. In a recent consultation, Subsidy control: designing a new approach for the UK, the Department for Business, Energy & Industrial Strategy (BEIS) suggested that in the future ‘Subsidies can, for instance, incentivise businesses to undertake research and development that increases economic productivity and wider prosperity, or to increase the uptake of low carbon technology.’ At the same time, it notes that it will not create subsidies or use state aid to distort a market, and this could be seen as a potential hint at future green subsidies. At this point, however, this can only be speculation. We may get more insight from the Subsidy Control Bill, announced in the Queen's Speech of May 11. Her Majesty stated that it was intended to, "support for businesses reflects the United Kingdom’s strategic interests and drives economic growth."
INDUSTRY ANALYSIS / reframing excepted cash assets
Reframing excepted cash assets ?? Legal precedent??
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What section does this falls under? Spring budget?
Reframing excepted Cash assets
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iven the recent Covid-19 driven lockdowns under which large swathes of UK companies were forced to close, you could be forgiven for thinking that holding significant cash reserves within a company to deal with unexpected cash-flow difficulties is a totally reasonable course of action. But herein lies a potential trap for businesses owners seeking BR qualification. The ‘excepted assets’ anti-avoidance measure within BR rules extends to cash balances within a business. As a result, a company cannot simply hold reserves to guard against a future economic downturn or unexpected circumstances. Instead, it must be able to show that the cash had a defined future purpose in the business. If not, the unused cash sitting in the business will be classed as ‘excepted’ and BR will not be available on it.
Legal precedent The legal precedent here was set in Barclays Bank Trust Co Ltd v IRC [1998] STC (SCD) 125, where the deceased held 50% of the shares in a company with a BR qualifying trade. The company’s turnover was around £600,000, and at the time of the deceased’s death, the company’s cash at bank was approximately £450,000. It was argued for the company that the cash held on the deceased’s death was required at that date for its future business use. HMRC accepted that the company needed cash of around £150,000, but argued that the other £300,000 was an excepted asset. The Special Commissioner commented: “I do not accept that ‘future’ means at any time in the future nor that ‘was required’ includes the possibility that the money might be required should an opportunity arise to make use of the money in two, three or seven years’ time for the purposes of the business. In my opinion and I so hold that ‘required’ implies some imperative that the money will fall to be used upon a given project or for some palpable business purpose.” According to Starling Bank,“The accepted wisdom is that companies should have three months’ working capital in an accessible bank account.” The Bank of Ireland suggests three to six months. But figures from the Office for National Statistics (ONS) in its, ‘Business insights and impact on the UK economy’ which has been published regularly since June 2020, show that almost one in four businesses now have more than six months cash reserves and that number is increasing.
Source: Office for National Statistics
In January 2014, in response to a query from the Institute of Chartered Accountants in England & Wales (ICAEW), regarding businesses retaining increased cash buffers in case of any further downturn in trade and HMRC’s view on this, HMRC stated: “We understand that due to the financial circumstances in which businesses find themselves, they may choose to hold more cash in case of a potential downturn in trade. We can also confirm that in recent times we have seen this on a more frequent basis where businesses hold cash in excess of what they would traditionally require. However, our guidance remains the same, and unless there is evidence which directs us to the fact that the cash is held for an identifiable future purpose, then it is likely it will be treated as an excepted asset. Therefore the holding of funds as an ‘excess buffer’ to weather the economic climate is not a sufficient reason for it not to be classed as an excepted asset.” As a result, typical advice has been to exclude from a company any assets that are not used for the business and for which the potential IHT liability is higher than the cost of excluding the assets (e.g dividend tax).
What now? Clearly, Covid-19 has brought about unprecedented circumstances not seen in 2014 or at the time of the Barclays judgement, but no new guidance has been issued by HMRC. KPMG’s approach is to work with businesses to ensure, “relevant records are retained from an IHT perspective in case of HMRC scrutiny. For example, to support significant cash balances being retained by businesses and the current financial crisis has justified those who have adopted a prudent approach in this context." The upshot is that clients who own businesses should not simply assume that funds sitting inside their business will automatically qualify for BR, particularly if the level of those funds is higher than might ordinarily have been the case prior to the current situation. They cannot just expect that HMRC will identify a higher cash reserve as being a sensible and commercial pandemic protection that obviously qualifies for BR. In fact, in response to a Freedom of Information request dated 29 April 2021, HMRC confirmed to Intelligent Partnership that it, “has not reframed its calculations of what volume of cash within a business should be considered as 'excepted assets' for the purposes of Business Relief as a result of Covid-19. Each case continues to be considered on its own merits in line with our published guidance.” The guidance on the ‘future use’ test remains that, “You need to consider the nature and previous history of the business and such evidence as may be produced as to prospective development and capital outlay. In particular, the extent to which cash, bank accounts, building society accounts and similar assets included in the accounts of a business may be excepted assets should always be examined carefully.”
uk companies cash reserves: dec 2020 vs. apr 2021
3 months or less
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more than 6 months
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HMRC'S VIEWS in 2014
- hmrc
hmrc HAS NOT REFRAMED ITS CALCULATIONS OF WHAT VOLUME OF CASH WITHIN A BUSINESS SHOULD BE CONSIDERED AS 'EXCEPTED ASSETS' FOR THE PURPOSES OF BUSINESS RELIEF AS A RESULT OF COVID-19.
Excepted assets Assets (including cash) within the business will be considered “excepted assets” and will not qualify for BR unless they are either: used wholly or mainly by the business concerned throughout the two years preceding the transfer to the beneficiary; or required at the time of the transfer for future use for the purposes of the business. Relief is still granted on the remainder of the business’s assets, as long as excepted assets do not account for over 50% of the business, in which case the business as a whole will not qualify for BR.
5. Managers in Focus
beringea blackfinch downing octopus seneca TIME br solutions comparison
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managers in FOCUS / beringea
manager video content
go to website
www.proveneps.co.uk 020 7845 7824 info@beringea.co.uk
Mark Taylor
Partner
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managers in FOCUS / blackfinch
Blackfinch.com 01452 717070 enquiries@blackfinch.com
dominique butters
Executive Business Development Manager
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manager content
managers in FOCUS / octopus
octopusinvestments.com 0800 316 2067 support@octopusinvestments.com
Rob Skinner
Head of the Octopus Inheritance Tax Service
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jessica franks
head of tax
managers in FOCUS / seneca
senecapartners.co.uk 07552 608942 chris.hood@senecapartners.co.uk
richard manley
CEO and co-founder
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Chris Bullough
CFO and co-founder
managers IN FOCUS / BR COMPARISON TABLE
Octopus Investments Octopus Inheritance Tax Service (Discretionary Managed Service) 2000 £9.3bn £2.5bn Renewable energy, healthcare infrastructure, property finance and fibre infrastructure 2007 Currently 1 N/A 3% per year £25,000 No 3 (2 of which are independent) Discretionary managed service 2% Up to 1% + VAT per year (AMC is deferred and contingent on performance meeting 3%) N/A N/A 1 week target, never taken more than 1 month to provide liquidity
TIME Investments TIME:Advance is a simple and effective IHT solution that uses BR to help investors potentially mitigate their IHT liabilities. The service invests in a diversified portfolio of asset-backed businesses and targets a net return of between 3% and 4.5% p.a. The service has received consistent industry recognition, with double wins at both Investment Week’s Tax Efficiency Awards and the Growth Investor Awards. 2011 £4 billion £660 million Renewable energy (wind, solar, hydro & biomass), secured property lending, operational real estate finance, self-storage and commercial forestry February 2013 1 4.20% 3% - 4.5% £25,000 (£10,000 top up) Yes, by regular withdrawal option (no dividends paid) 4 directors & independent advisory panel of 6 Discretionary Portfolio Service 2.5% + VAT 0.5% (inclusive of VAT) and deferred until exit and only payable from the excess over a return of 3.5% p.a. N/A N/A 2 weeks
Blackfinch Investments Ltd The Adapt IHT Portfolios are our flagship Inheritance Tax (IHT) solution and are well established. It offers return potential and competitive charges alongside a route to IHT relief. Our four model portfolios cater to the need for diverse, ESG focused IHT offerings. Blackfinch only takes its annual management fee of 0.5% plus VAT after achieving a minimum target return of 3% p.a., 4% p.a., 4.5% or 5%+ p.a., depending on which of the four model portfolios an investor has selected. 1992 £540m £201m Asset-backed lending, property development finance and renewable energy generation Dec-13 3 underlying companies Refer to factsheet for latest annual performance. Since Inception*: Ethical - 3.06% Balanced - 4.02% Balanced Growth - 4.48% Growth - 4.92% *Historic performance has been calculated based on the performance of the underlying companies. Ethical 3% Balanced 4% Balanced Growth 4.5% Growth 5%+ All targets are net of fees" £25,000 We do not have an income portfolio but withdrawals are available We have two directors and three independent directors involved in this product: an Independent director for each of the three investee companies" Discretionary Portfolio Service 2% 0.5% + VAT deferred until exit and only if target return has been achieved No performance fees N/A 2-4 weeks
Downing LLP The Downing Estate Planning Service (DEPS) looks to provides full IHT relief to investors after two years by investing in IHT-qualifying businesses in two sectors: asset-backed and energy & infrastructure. The target return to investors is 3%-4.5% p.a. over the medium term. The Service offers standard Downside Protection which will cover for any loss in value of up to 20% of net initial investment on death (only if under 90 years of age). This comes at no extra cost to investors. The Service also offers optional life cover, which is dependent on meeting medical conditions. 1986 £1.4bn Over £535m The two different investment strategies are: - Energy and infrastructure: focusing on renewable energy generation businesses, as well as energy infrastructure assets. - Asset-backed: Revenue generating businesses with tangible assets. Examples may include care homes, secured lending and property development. Feb-13 77 3.09% p.a. if an investor had a 50:50 split across the two strategies (net of fees) 3%-4.5%p.a. (net of fees) £25,000 Yes, investors can opt to sell their shares to receive regular distributions on a monthly, quarterly, half-yearly or annual basis. 4 on Bagnall (3 are independent), 3 on Pulford (2 are independent) The Service is a discretionary managed portfolio of trading companies. Each investor will become a direct shareholder in the underlying company(s). The Service is not an unregulated collective investment scheme 2% Up to 0.5% +VAT p.a. of net assets. Subject to a minimum investor return of 3%. If investor returns are between 3% and 4% p.a., the charge will apply on a sliding scale – up to a maximum of 0.5% p.a No performance fee N/A The Service will provide exit opportunities on a twice-monthly basis, subject to 10 days’ notice, liquidity and Downing’s discretion.
Beringea LLP The ProVen Estate Planning Service is a Discretionary Management Service that aims to achieve capital growth of 4-5% over the medium term, providing full IHT relief to investors focusing on two distinct sectors: 1. Lending businesses via Proven Legacy PLC (SME Lending) and Secured Lending Limited (Energy/Infrastructure and Property lending) 2. Solar Energy generation businesses via Solar Growth Limited (mostly Large-Scale Ground Mounted) and Solar Income and Growth Limited (mostly Roof top Solar) Investors have the flexibility to select if they want 100% lending, 100% solar or a mixture of both within their application. There is a clear and straight forward investment strategy into established trading sectors with predictable revenue streams; this includes a level of government backed income streams. The UK Solar trading companies focus purely on well-established solar technologies rather than pursuing less established renewable energy trades; being UK based, there is no volatility foreign assets. 1988 US$740m £90m Lending and Solar ProVen Legacy established in 2016 Secured Lending 2014 Solar Growth 2013 Solar Income & Growth 2013 4 (SPVs of 25) Please see updated fact sheets. All companies are performing well. In particular, Solar Income & Growth has a 5 year actual return per £100 invested 1st January 2016 and exited 31st December 2020 of £121.00 4-5% £25,000 Yes 3/4 per trading co Discretionary Management Service 2% 1.50% No performance fees NA Monthly
Manager name Description of Offer provider year founded provider assets Under Management Product Assets Under Management Sector Launch Date (of Service) Number of Investee Companies Annual return since inception Target annual return and/or target yield (where stated) Minimum Investment Income available? Number of directors Legal Structure Initial fee AMC Performance Fee Performance Hurdle Target Liquidity
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Seneca Partners Limited The Seneca IHT Service is a discretionary service designed to provide 100% Business Relief after two years with a target return of 4% p.a. available as income or growth. The qualifying trade is asset backed lending across a diverse portfolio including social housing, property, receivables, vehicles and stock. No performance fees are charged and the 1% AMC is charged to the investee companies (within their overall cost cap of 3% +VAT). 2010 £200m (group) £30m+ Social Housing, Property, Receivables, Vehicles and Stock Apr-14 Up to 2 Growth 4%, Income 4% (IHT Service- Oct 17) 4% p.a. £50,000 initial (£25,000 subseqent) Yes - natural income distributed quarterly 2 Limited companies 2%* (advised) or 3%* (non-advised) Dealing Fee up to 0.2% 1%* - charged to investee companies 0% N/A 3 Months (Never exceeded)
TIME Investments TIME:CTC (Corporate Trading Companies) is an IHT solution designed to help businesses utilise or reinstate existing BR, allowing them to mitigate their IHT liabilities, potentially immediately. The service holds a 25-year track record and allows business owners to maintain control of their assets, avoiding the need for trusts or to gift assets to obtain relief. The service targets a net return of between 3% and 4.5% p.a., investing into asset backed businesses. 2011 £4 billion £89 million Primarily secured property lending and operational real estate finance, with some potential exposure to renewable energy (wind, solar, hydro & biomass), self-storage and commercial forestry October 1995 N/A N/A 3% - 4.5% £100,000 (£25,000 top up) Yes, on request only and subject to the company having sufficient retained earnings 1 director from TIME and CTC Directorships Limited (a board of independent non-executive directors) appointed to each CTC company Bespoke IHT Service 3.5% + VAT 0.5% (inclusive of VAT) and deferred until exit and only payable from the excess over a return of 3.5% p.a. N/A N/A Target 4-6 weeks
Manager name Description of Offer provider year founded provider assets Under Management Product Assets Under Management Sector Launch Date (of Service) Number of Investee Companies Annual return since inception Target annual return and/or target yield (where stated Minimum Investment Income available? Number of directors Legal Structure Initial fee AMC Performance Fee Performance Hurdle Target Liquidity
6. What's on the Horizon?
Upcoming IHT changes? moving on from covid-19: what's next what the managers say
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Upcoming IHT changes?
WHAT'S ON THE HORIZON / upcoming iht changes
ith IHT firmly back on the government’s agenda following Tax Day, it’s worth considering what other changes the government might look to introduce in the near future. In their Tax Day response to the Office For Tax Simplification’s (OTS) 2018 review first report, the government already mentioned they were considering the OTS recommendation to introduce an entirely digital journey to probate. In his response, MP Jesse Norman also stated the government plans to respond to the OTS’s second IHT Report from July 2019 ‘in due course’. Whereas the first report focussed on easing the administrative costs and complexities around settling estates, the second report focussed on three areas: the interactions of IHT with capital gains tax (CGT), Agricultural relief (AR) and BR, and lifetime gifts.
Although BR was originally designed as a way to prevent family businesses needing to be broken up or sold off in order to pay IHT, it has since also developed into a key channel in funneling funds into unlisted businesses and the AIM market. The OTS acknowledged that BR plays an important role in promoting AIM as one of the world's premier growth markets. The changes it suggested are quite technical in nature. For example, in relation to what proportion of trading versus investment activity a BR qualifying company should have. In order to remove inconsistencies across the tax landscape, the second report recommends changing the proportion of qualifying trades a company undertakes before BR qualfication (and IHT relief) is available to match the proportion required for Gift Holdover relief and Business Asset Disposal Relief (both providing CGT relief). More than 50% of a company’s trading activity must currently be in BR-qualifying trades, with investment activities included among those that are non-qualifying. But CGT relief by way of gift holdover relief or Business Asset Disposal Relief, requires an 80:20 split of trading vs investment. This could see the government lifting the qualifying trading requirement for BR up to 80% to bring the reliefs in line. This would result in a number of companies that currently qualify for BR becoming potentially excluded, limiting their access to investor capital, but also reducing the number of options for BR investors. The OTS also suggested reviewing the treatment of indirect non-controlling holdings in trading companies which is different for BR purposes than it is for income tax and CGT. If the BR treatment were aligned with income tax and CGT, it would broaden the opportunity for limited liability companies (LLPs), for example, to qualify for BR. Another recommendation was that the government should consider whether to align IHT treatment of furnished holiday lets with that of income tax and CGT, where they are treated as trading providing that certain conditions are met. If the latter of these moves was to allow furnished holiday lets to qualify for BR without the current legal grey areas, this would be extremely positive. Holiday lets can provide relatively safe, seasonal returns over the long term, making them potentially attractive to BR investors. In addition, multiple other land-based activities and their Business Relief qualification could benefit. If any of these changes were to be made, current BR rules allow BR investors and managers to sell assets that would no longer qualify, and buy into companies that did, without the need to reset the BR two year minimum holding qualification clock, providing the reinvestment was made within three years of the disposal.
Second report recommendations
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- CEO Richard Manley, Seneca Partners
With the UK Government likely to seek to maximise tax revenue in the coming years to fund the cost of Covid-19, optimising the efficiency of personal tax affairs will become an ever more pressing matter. Inheritance Tax is just one such tax where advisers can seek to reduce their clients’ potential tax liability upon death via an investment in a BR related Inheritance Tax Service – many of which have now developed into tried and tested solutions with attractive performance records.
Although IHT and CGT typically target different areas, the fact CGT is erased at death means inheritors can benefit from what is known as the ‘capital gains uplift.’ This can cause confusion, and create situations where assets are transferred in death rather than life, simply to benefit from the CGT uplift. For example, Mo buys £100,000 worth of BR-qualifying shares. 10 years later, those shares are worth £150,000. If Mo sold those shares, it would crystalise the £50,000 gain and a CGT liability would be due on that gain. However, if Mo retained the shares and passed them on death, the beneficiary would pay no CGT or IHT on the £150,000 as the uplift in the value of the legacy is not liable to CGT when inherited. So, when the inheritor disposes of the shares, only amounts above the value of the shares when he interited them (£150,000) are assessed for CGT. However, if these shares had been handed over in life, CGT would have applied to the £50,000 gain. The OTS questioned if it was fair in these circumstances for the benefactors to in effect pay 0% tax on these assets. Therefore, the OTS suggests where an exemption from IHT applies, the CGT uplift be removed, and instead provide that the recipient is treated as acquiring the assets at the historic base cost - often known as a ‘no gain, no loss’ transfer (In our example above where the shares are passed on on death this would have been the £100,000 at which the shares were originally bought, rather than the £150,000 value at which they were inherited by the beneficiary). CGT would then be payable when the assets are disposed of by the inheritor. Since the IHT report, the OTS has doubled down on the ‘no gain, no loss’ concept, and in November 2020 released a set of recommendations surrounding CGT. While the CGT review again called for the introduction of ‘no gain, no loss’ to cases where a relief or exemption from IHT applies, it added additional recommendations:
interaction with capital gains tax
In contrast to BR and AR, the OTS made some more dramatic recommendations for gifting. The OTS found that for many people the current raft of gifting exemptions is too complex, while the 7 year wait until gifts become IHT free is too long. Executors said it can be difficult to obtain records going back up to 7 years, and the OTS noted that older gifts did not generate very much tax - just £1 million IHT in 2015-16 was paid from gifts made 6-7 years prior. This was out of a total £4.38 billion IHT paid that year. The taper added another layer of complexity on top of this, and the OTS found many did not fully understand it. It added that some of the exemptions had not kept pace with inflation. For example, if the £3,000 annual exemption had kept pace with inflation since it’s introduction, it would now be worth approximately £11,900. As a result, these exemptions allow for estates to pass on relatively small amounts of money, with a trade off being increased confusion and difficulty understanding what will and will not incur IHT. The OTS made the following recommendations, among others:
GIfTS
1) The government should consider removing the capital gains uplift on death more widely, and instead provide that the person inheriting the asset is treated as acquiring the assets at the historic base cost of the person who has died. 2) If the government does remove the capital gains uplift on death more widely, it should consider a rebasing of all assets, perhaps to the year 2000
Certainly, the idea of the government suddenly acquiring new taxable items could be appealing for a chancellor looking to raise new revenue, but the benefits within the current drive to simplify and clarify taxes in an effort to aid correct reporting and payment and to close the tax gap, may be questionable. Then there is a risk that the very family businesses BR was set up to protect, will simply fall victim to large CGT rather than IHT bills, particularly if the deceased was a major shareholder for a long period, even if a rebasing of assets took place. Another factor to consider is that estate planners may be left to choose between IHT and CGT mitigation, taking into account the estate value and asset types. Where the decision is to leave an IHT liability rather than a CGT bill for beneficiaries, SMEs and AIM companies could find themselves missing out on BR investment - a particularly unwelcome result right now.
1) Reduce the 7 year period required until gifts become IHT free to 5 years, but abolish the taper 2) The government should, as a package: - Replace the annual gift exemption and the exemption for gifts in consideration of marriage or civil partnership with an overall personal gifts allowance - Consider the level of this allowance and reconsider the level of the small gifts exemption - Reform the exemption for normal expenditure out of income or replace it with a higher personal gift allowance
Given the fact that since this report came out the government has frozen the Nil rate band (as well as numerous other tax thresholds), it seems unlikely the government will look to dramatically increase the amount that can be passed onto the next generation tax free via gifting, however the idea of a simplified gifting structure may find more success.
Refresher: Current gifting rules
Currently, a client is able to gift up to £3,000 each year tax free. Anything above that will incur IHT if the estate is large enough, and the client dies within seven years of making the gift. If the client dies sooner and there is IHT to pay on this gift, a taper applies after 3 years. So between 3 and 4 years after the gift, a 32% IHT tax rate applies, then 24%, 16%, 8% and then, after 7 years, 0%. There are a number of exemptions to this - for example for wedding gifts up to a certain size, gifts to charities or political parties or gifts under £250 do not incur IHT. For more information on gifting, see our Estate Planning Guide
OTS IHT 2nd Report - CGT
moving on from covid-19: what's next
WHAT'S ON THE HORIZON / moving past covid 19: what's ahead
Surge in property market set to continue The government’s action to stimulate the housing market, including the stamp duty holiday on properties up to £500,000 in value and extending the help to buy equity loan for new builds to non first time buyers, has been remarkably successful; according to HMRC there were 190,980 UK residential transactions in March 2021, more than double the number in March 2020, and Stamp Duty receipts reached £1,196m in March, with only four other months recording higher figures since the tax was introduced in 2003. But, speaking to Financial Reporter, Anna Clare Harper, chief executive of asset manager SPI Capital, pointed out that, “the reduced stamp duty has not been the only driver of house price growth over the last year. We also have cheap debt as a result of very low interest rates, which give buyers a ‘discount’; the release of pent-up supply and demand and desire to improve surroundings among existing homeowners; and the ‘flight to safety’, since in times of uncertainty, people want to put their money in a stable asset with low volatility. These trends are likely to hold up throughout 2021." The pandemic has also freed many from having to live in close proximity to their place of work, with working from home now much more widespread and accepted. As a result, many are reconsidering where they want to live and are able to pursue a change. This is made more possible with the growth in lenders offering high loan-to-value deals, as well as the government backed 95% mortgage guarantee scheme and 95% loan-to-value ‘Help to Build' scheme launched in April 2021. Mark Hayward, chief policy advisor at Propertymark noted, “The imbalance of supply and demand means it’s an extremely strong sellers’ market; properties are selling quickly and for over the asking price, and this is something we expect will continue in the coming months.” With growing demand, comes growing prices and upward pressure on estate values.
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Covid-driven changes continue to require attention Plans change and Covid-19 has made it very clear that the unexpected can be just around the corner. So it’s worth reviewing your clients’ current arrangements now, rather than waiting for the next scheduled review. Are your client’s plans still current and relevant? Do they still meet their objectives? Have their objectives changed? Has the crisis led them to make a new will without your input? Has the Covid-19 lockdown effect led to a divorce in the family? Has long Covid resulted in a power of attorney being invoked? Since BR can be useful where an attorney is managing financial affairs for a donor who has lost capacity and where a trust is set up to ensure specific parties do not receive bequests by default, BR is a tax-efficient tool to place assets into trust. For clients who own their own business, there are proactive steps that can be taken now to address the tax-efficiency of future legacies. This could be through reorganising groups where substantial investment/ non-qualifying activities mean that no BR is currently available, despite qualifying activities being undertaken within the group.
Although the UK has now left the EU, the current regulation on what information managers need to disclose has remained in place for now. Packaged retail investment and insurance-based products (PRIIPs) is an investment category involving publicly marketed financial products that have underlying assets, including shares, designed to provide a return over time and have an element of risk. Although not specifically mentioned in the PRIIPs Regulation, BR estate planning services fall under the definition of venture capital investments, which would classify them as PRIIPs. Since the introduction of the PRIIPs regulation at the start of 2018, managers have been required to create a three page Key Information Document (KID), giving investors information based on a set of standardised methodologies the EU thinks they require in order to make informed investment decisions.
The regulation has faced criticism in the past due to its one size fits all approach, and how it requires precise wording, when it covers a diverse array of investment products. It has been argued that the regulation in the KID is not drafted in such a way as to create consistent results that do not mislead the consumer. There have been other criticisms as well. For example, KIDs are required to give performance data, including forecasts for various pre-determined scenarios. This has led to suggestions that their use of past data to generate future predictions might create unrealistic expectations. Future Divergence With the UK now outside of the EU, it has more freedom to update these rules, and potentially address the criticisms. In July 2020, HM Treasury outlined 3 initial changes it intended to make to the PRIIPS regime in the UK: 1) An amendment enabling the FCA to clarify the scope of the PRIIPs Regulation through their rules. 2) An amendment to replace ‘performance scenario’ with ‘appropriate information on performance’ in the PRIIPs Regulation. 3) An amendment enabling HM Treasury to further extend the exemption currently in place for Undertakings for the Collective Investment in Transferable Securities (UCITS) funds.
Add the Box out; Information present in KIDs after first 4 paras, then Future divergence after the next two paras and Button: UCITS vs PRIIPs, then 3 more paras before Developments in Europe.
- Shane Elliott, Beringea
We favour BR investments into established UK trading companies that have a clear and straight forward investment strategy, with predictable revenue streams and profitable track records.
Information present in KIDs
• Information about the product and its objectives • The potential risk and returns associated with the product • Performance scenarios illustrating hypothetical future performance under a range of assumed market conditions • Information regarding compensation that the investor may be entitled to if the PRIIPs manufacturer fails to pay out • The costs associated with investing in the product • An indication of the recommended holding period for the product and information about the potential consequences if the investor exits their investment early
Source: HM Treasury, Amendments to the Packaged Retail Investment and Insurance-based Products Regulation:July update
preparing for post-brexit priips
UCITS is a regulatory framework that came into force in 2011 (prior to PRIIPs regulation) for mutual funds based in the EU. These are generally regarded as relatively safe investments. The UCTIS regulation required funds produce a 2 page Key Investor Information Document (KIID). All UCTIS funds also fall under the PRIIPs definition, and therefore may have potentially had to create two documents saying very similar things. As a result, the EU exempted UCTIS from PRIIPs regulation until 2019. This was then extended until the end of 2021. According to HM Treasury, the Government considers existing UCITS disclosure rules satisfactory, and therefore suggests extending the exemption for another 5 years. At this point, the Treasury will be better placed to time the transition of UCITS funds into whatever domestic successor after a planned review of the UK framework for investment product disclosure. BR funds are not UCITS, and therefore come under PRIIPs regulation
These are clearly initial moves, designed to give the FCA a greater say in how PRIIPS are administered - once these changes come into force, the FCA will be able to clarify the scope of those who need to provide a KID under the PRIIPS regulations, and amend what information on performance will be required in KIDss. In it’s July Update, HM Treasury said it intends to bring these changes into legislation ‘when parliamentary time allows.’ In April 2021, provisions designed to facilitate them were passed into law when the Finance Bill 2019 - 21 received Royal Assent as the Finance Act 2021. It should be noted these changes are deliberately limited in scope, targeting what the Treasury considered the most pressing concerns. In the longer term, it intends to conduct a more wholesale review of the disclosure regime for UK retail investors, including a look at harmonising the PRIIPs regime with requirements set out in MiFID II.
Developments in Europe Although the UK has left the EU, changes to PRIIPs regulation could still have an effect on the future regulation in the UK, if the UK were to look at how the EU has fixed (or at least tried to fix) some of the issues with KIDs. Recently, the European Supervisory Authorities (ESAs) published a number of updates to the EU rules which included a split between structured and non-structured funds in some regards. The proposed rules make some alterations to how non-structured funds (which would have included BR estate planning services) calculate performance scenarios, as well as allowing them to include a link in the performance section to ‘other relevant data’ - which would be a bar chart showing the discrete annual returns over the past ten years. Whether the UK will follow the EU’s lead here, or make more extreme changes only time will tell.
UCITS vs PRIIPs
Are there any elements to the Brexit trade deal you expect to have a significant impact on BR?
We do not expect Brexit to have a significant impact upon BR, as IHT legislation has sat outside the jurisdiction of the European Union. For the companies available through the Beringea Estate Planning Service, which are primarily based in the UK and generate the majority of their revenues domestically, there have been some operational challenges to consider but the trade deal is unlikely to have a lasting impact on performance.
How do you think the recent budget will impact the BR funds?
The main impact of the recent budget has been the increase in corporation tax (CT). For the solar companies, the impact of the rise in CT to 25% (from 19%) in 2023 is now priced into the Q1 valuations. The new 100% capital allowances will bring some benefit as funds are deployed into new solar projects. The lending companies are marginally impacted with returns diluted from an increased corporation tax charge.
As we (hopefully) emerge from the worst of the Covid lockdowns, what do you expect the future to hold for BR?
The economic recovery that seems likely to characterise the next twelve months, as the UK emerges from lockdown, will provide opportunities for the trading companies available to investors through the Beringea Estate Planning Service. The trading companies have remained stable throughout the pandemic, and they are now positioned strongly to harness the bounce-back in consumer and corporate spending that is expected for the coming year.
With no financial services equivalency agreement, and continued political risk, investors may not wish risking further European exposure. This could lead to investments such as BR being considered as part of a client’s allocation to alternatives, with the added bonus of the available tax reliefs. Indeed, our BR trading activity is all solely within the UK. In addition, ESG is becoming increasingly important to clients and as Blackfinch is signatory to the PRI (principles for responsible investment) all our tax efficient portfolios and mainstream products have an ESG focus which reflect our Group ESG policies.
The planned Corporation Tax increase in 2023 has had an immediate impact on the valuation of the renewable energy companies within our IHT portfolios. Extra taxation on the profits within the portfolio companies means that returns will be less for clients when the Corporation Tax increase is introduced.
BR has been encouraging UK job creation and investment for 45 years. Post-pandemic, investment in renewable energy and technology, both of which are BR-qualifying, must be allowed to grow. Investors have also benefitted from holding an uncorrelated asset class that can help to diversify their portfolio. These factors should result in even stronger growth in BR investing.
sarah hendy
Strategic Partnerships Manager Blackfinch
There is still uncertainty around the longer-term impact of the Brexit trade deal, which could take many more months and years to resolve. Nevertheless, many of the underlying businesses held in the asset-backed and energy & infrastructure portfolios are ‘locally focused’ and as such have been relatively sheltered from the impact of Brexit so far.
We expect there to be some impact to the profitability of both the IHT Companies and their underlying businesses following the increase in the rates of Corporation Tax from 6 April 2023. However, at this time, we do not expect this effect to be material enough to change our investment strategy or to impact on our ability to achieve the investment objectives as set out in the product literature.
We anticipate the future looking bright for our BR products. The fundamentals of the sectors we focus on haven’t changed and there are likely to be buying opportunities in a number of the asset-backed sectors, and a further focus on renewable energy across the world after Covid-19 has taken the focus away from it for the last twelve months.
No, not to a significant extent. Our largest portfolio company, Fern Trading, has a diverse trading business that operates across a number of sectors, which includes some overseas revenue (including within the EU), but we have not experienced any significant impact (positive or negative) as a result of the Brexit trade deal, nor do we expect to.
The announced increase in corporation tax is likely to have some impact to all portfolio company valuations as it has effectively increased running costs of those businesses. The future increase in corporation tax has been factored into our valuations and reflected in Fern’s share price; however, the full impact of the increase has been partly offset by enhancement to capital allowance rules which are particularly advantageous for Fern due to its current capital spend on developing renewable energy assets and fibre networks.
We think that BR can play an important role in the economic recovery as the UK emerges from lockdown. The typically long term nature of investments into qualifying companies supports the growth and productivity of businesses across the UK, enabling them to provide valuable services, create jobs and expand on economic activity.
We do not expect the Brexit trade deal to have a significant impact on BR. BR is a well established element of the UK tax system and we have not identified anything in the Brexit deal which indicates potential changes to this. More generally securing a Brexit deal is of course positive for the UK economy and in turn the secured lending business which lies at the heart of the Seneca IHT Service as it removes much of the uncertainty that was previously associated with the Brexit process.
Given the attractive tax benefits of utilising a BR investment solution and the track record of providers like Seneca we do not expect the recent budget to have a significant impact on the demand for the Seneca IHT Service. Changes to tax legislation will of course rise up the agenda as the UK government seeks to pay down the Covid-19 debt so we must of course remain mindful of any impact that changes to BR could have, but for the time being the outlook is stable.
We see a positive future for Seneca’s IHT Service and BR more generally. Recovering from the economic challenges brought about by Covid-19 will no doubt require investment which in turn is expected to provide a good pipeline of lending opportunities for the funds raised under Seneca’s BR solution. With a continuing proactive approach to the management of these loans with a particular focus on our security position, we believe that we will continue to safeguard our investor’s capital in an IHT efficient manner whilst continuing to generate retained earnings to support NAV growth in line with our target return over the longer term.
Sales Director, Tax-advantaged Investments Seneca
We expect that overseas holders of renewable energy assets may continue to dispose of their UK holdings, this has helped to increase the supply of good quality renewable energy sites often with generous inflation linked subsidies. We have invested in a number of renewable sites across the UK over the last year, including our first wind farm in Northern Ireland. As a solely UK focussed BR manager, we do not expect any adverse consequences from Brexit or any proposed trade deals.
No changes were announced to BR, which is always positive news. Both the Nil Rate Band (NRB) and Residence Nil Rate Band (RNRB) have been frozen at £325,000 and £175,000 respectively until April 2026. This will likely push some families’ estates over the threshold and into paying Inheritance Tax (IHT), particularly considering rising house prices and investment growth, which will likely lead to more demand for BR funds to help mitigate this IHT liability. The increase in corporate tax from 19% to 25% is unwelcome news to business owners across the country. With BR services typically onshore and payers of corporation tax, we would expect returns to be impacted once the higher corporate tax rate is introduced in 2023.
We have been fortunate that the Covid-19 lockdowns and restrictions have had very little impact on our assets and performance. Some clients have been reluctant to make new investments during the pandemic due to economic uncertainty, however we would hope that as the lockdown eases and clients can meet their financial advisers face-to-face again there will be renewed vigour for later life and estate planning. The nature of BR investments means that deferring a decision only delays the qualification period for BR, so we anticipate that the BR market will see significant fundraising growth once life returns to normal.
WHAT'S ON THE HORIZON / WHAT THE MANAGERS SAY
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learning objectives cpd and feedback about intelligent partnership disclaimer
7. Further learning
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learning objectives
further learning / learning objectives
HOW DID YOU DO?
Covered in section 2. Coronavirus developments, Budget news
Outline how Business Relief sits within the current IHT landscape
Covered in section 2. Covid-19: A changed context for BR, Business Relief Developments and Budget News
Recognise the various factors that will affect the Business Relief market in the coming months
Covered in section 6. What changes might be on their way, Moving past Covid-19: What’s ahead?
Define the types of open Business Relief offers available on the market.
Covered in section 3. and section 5
Benchmark current products and providers against each other on key investment criteria
Covered in section 5
Evaluate the key fees and charges applied by Business Relief managers
Covered in Section 3
Identify the main developments and news in the Business Relief market.
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CPD and feedback
further learning / cpd and feedback
Intelligent Partnership has achieved accredited status from the CII and PFS. Members of these professional organisations represent the majority of the insurance, investment and financial services industry.
R
eaders of the Business Relief Quarterly Update can claim up to two structured CPD hours towards their CII or PFS member CPD scheme for the time spent reading this Update (excluding breaks). The review process included an assessment of the technical accuracy and quality of the material against CPD Accreditation standards. Achieving the recognised industry standard afforded by these organisations for this Update, and our training, demonstrates our commitment to delivering only balanced, informative and high quality content to the financial services and investment community. In order to obtain CPD and meet accreditation standards, readers must complete a short questionnaire and provide feedback on the report. This includes 10 multiple choice questions to demonstrate learning and a feedback form to assist in the compilation and improvement of future reports. To claim your CPD please visit: intelligent-partnership.com/cpd
Intelligent Partnership actively welcomes feedback, thoughts and comments to help shape the development of these Quarterly Industry Updates. Greater participation, transparency and fuller disclosure from industry participants should help foster best practice and drive out poor practice. To give your feedback please email: publications@intelligent-partnership.com
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e provide a wide variety of ways to keep advisers and industry professionals up to date with the latest developments. Our content includes a range of engaging, accessible and CPD accredited resources as well as industry leading events:
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This publication is not included in the CLA Licence so you must not copy any portion of it without the permission of the publisher. All rights reserved. No parts of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means including electronic, mechanical, photocopy, recording or otherwise, without written permission of the publisher. This publication contains general information only and the contributors are not, by means of this publication, rendering accounting, business, financial, investment, legal, tax or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional adviser. Neither the contributors, their firms, affiliates nor related entities shall be responsible for any loss sustained by any person who relies on this publication. The views and opinions expressed are solely those of the authors and need not reflect those of their employing institutions. Although every reasonable effort has been made to ensure the accuracy of this publication, the publisher accepts no responsibility for any errors or omissions within this publication or for any expense or other loss alleged to have arisen in any way in connection with a reader’s use of this publication. This publication is based on the authors’ understanding of the structure of the arrangements detailed, the current tax legislation and HM Revenue & Customs practice as at June 2021 which could change in the future. It is not an offer to sell, or a solicitation of an offer to buy, the instruments described in this document. This material is not intended to constitute legal or tax advice and we recommend that prospective investors consult their own suitably qualified professional advisers concerning the possible tax consequences of purchasing, holding, selling or otherwise disposing of shares in potentially Business Relief qualifying companies. Intelligent Partnership is not authorised and regulated by the Financial Conduct Authority and does not give advice, information or promote itself to individual retail investors. It is the responsibility of readers to satisfy themselves as to whether any arrangement contemplated is suitable for recommendation to their clients. Tax treatment depends on an investor’s individual circumstances and may be subject to change. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.
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