BR Guide Second Edition

18 THE CASE FOR BR Key Risks Investment Risk Investments into unquoted small and medium-sized enterprises are always going to be deemed high risk as, statistically speaking, smaller companies fail more often than larger, more established companies. These risks can be offset, to some extent, by skilful stock selection and sufficient diversification, by identifying project based opportunities (where a company is set up to complete a specific project, for example a solar farm or a hotel) where outcomes are less uncertain, by investing in opportunities where tangible assets can provide some degree of capital protection, or by a combination of all three. Where suitable, investors can also access insurance to cover a loss in value or a charge to IHT if an investor dies before the assets qualify for BR. Liquidity Even though ongoing access to funds is one of the advantages BR has over other estate planning options, liquidity can be limited due to the nature of the underlying assets. There is no large-scale active secondary market in unquoted shares and managers therefore achieve liquidity by matching inflows and outflows (matched bargain), selling assets, a share buyback, or by retaining a cash buffer as part of the service. Although managers often aim to facilitate withdrawals within weeks, this is not guaranteed, particularly in the event of a downturn or any event which prompts a high number of redemptions. AIM listed shares offer more liquidity, but some holdings may still take some time to liquidate and may have to be sold at a discount in order to achieve faster liquidity. Finally, the two-year qualifying period imposes an investment horizon of at least two years before withdrawals are advisable. Tax Risk There are four principal scenarios where relief might be lost: a qualifying investee company changes its activities so that it is undertaking activities that are “wholly or mainly” non-qualifying for the relief (dealing in securities, stocks or shares, land or buildings, making or holding investments), the company lists on a recognised exchange, the government changes the rules, or the investor has either not owned qualifying assets for the minimum holding period or was not holding the assets at the date of death or time of chargeable lifetime transfer. However, the ownership test is treated as satisfied if the property replaced other business property eligible for relief, provided that the combined period of ownership is at least two years out of the preceding five years. The risk must be considered in the context of: • Doing nothing: the value of the estate that exceeds the NRB and RNRB allowances is guaranteed to be taxed at 40% * . • The advantages of BR against the risks of other estate planning solutions. They may have less investment risk or tax risk attached to them, but that could come at the price of lower levels of access, flexibility and growth. The longer holding period required also means that other estate planning solutions have a higher risk of not achieving IHT mitigation on death. * Assuming no change in future legislation or rate of IHT. BR in Detail There are a number of ways to seek to access BR, and we’ll take a look at each of them in this section. The sector boasts some expert managers and they cater for a variety of investment objectives. In general, though, estate planning services available for personal client investment into BR services can be broadly split between AIM and non AIM portfolios (those investing in entirely unlisted/unquoted assets). Investors must have ownership of the underlying assets: collective structures would not qualify for BR. There are two typical structures: a discretionary managed portfolio, or an investment in a single company that undertakes the underlying trades. Corporate BR investors are those who have their own business. They make potentially BR qualifying investments with excess funds derived from their company. Along with private investors, they can invest those funds through a variety of structures and underlying assets although business owners are likely to have additional considerations. This section will conclude with options and solutions available to corporate clients. Private Client/ Personal Investment Non-AIM BR While BR can apply to both AIM and NEX markets, this guide predominantly focuses on AIM services when considering quoted BR investments. Some managers focus their services on AIM quoted shares and then there are those who invest exclusively in unquoted/ unlisted assets. The greatest portion of funds invested in BR based estate planning services are invested in unquoted/unlisted assets (i.e. not in AIM portfolios). Logically, this makes sense and fits in with the typical primary objective of capital preservation. As it is a traded market, AIM share prices can be volatile and investing on AIM can therefore be risky. 3.1 IHT receipts increase 44% in a month. FT ADVISER, APRIL 2019