BR Guide Second Edition

23 22 BR INVESTMENT OPTIONS BR INVESTMENT OPTIONS UNREGULATED COLLECTIVE INVESTMENT SCHEME (UCIS) A UCIS is a collective investment where investors’ funds are pooled and invested in unregulated assets such as property or unquoted companies. Estate planning services that utilise BR are typically not collective investments, and therefore they are not UCIS. This is because the client retains beneficial ownership of the underlying shares or assets on an individual basis. There are a small number of services that are structured as UCIS and therefore they are subject to tighter rules around their distribution - they can only be promoted to sophisticated and HNW investors. As always, the best policy is to ask the manager if there is any doubt over the structure. SINGLE COMPANY It is, of course, possible to invest into a single BR qualifying company. This might be an option for an investor with close ties with a particular company and who therefore has very clear insights into its activities and prospects for continued operation. However, the lack of diversification across companies and sectors does present greater risk than investment across a portfolio with multiple BR qualifying assets. EIS & SEIS The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) are long-standing government initiatives designed to encourage investment into small and medium sized businesses. Once trading activities have commenced (and subject to the minimum holding period for BR qualification) SEIS and EIS qualifying investments will generally qualify for BR because the investor will hold shares in an unquoted trading company. However, to be eligible for the generous SEIS and EIS tax reliefs (30% income tax relief, 100% CGT relief, CGT deferral relief and loss relief), there are additional qualification criteria over what is required for BR purposes including (but not limited to) the nature and age of the trade, the number of employees and the gross assets of the company. There are also caps on the amount of capital that can be raised using venture capital schemes. EIS and BR are sometimes used in combination - if clients have surplus investable assets, an EIS investment may be used to maximise the income tax relief, or defer tax on gains elsewhere, and the remainder is placed into a BR service for the IHT mitigation. Of course, EIS and SEIS bring additional tax benefits, but since March 2018 they have been subject to risk-to-capital conditions. These are designed to exclude tax-motivated investments, where the tax relief provides most of the return for an investor or with a capital preservation motive. This has pushed up their risk profile. EIS and SEIS also usually have lower levels of liquidity and higher levels of fees. So, if the objective is IHT relief while retaining access to the funds and the risk appetite is lower, then BR should be preferred over EIS or SEIS. More information on the EIS can be found in Intelligent Partnership’s annual EIS Industry Report. and regularly updated Adviser’s Guide to EIS. Whilst shares in EIS are likely to qualify for BR, shares in Venture Capital Trusts (VCTs) do not qualify for BR as VCTs are listed companies. AIM STRUCTURE AND STRATEGY OF AIM BR Discretionary portfolio Due to the requirement for the underlying investments to be held directly in the investor’s own name, holding AIM shares in a conventional collective investment fund structure would not achieve BR relief, as this creates an extra layer between the investor and the company. Instead, those looking for BR benefits must either take the “do it yourself” route (we have already discussed the significant disadvantages of the DIY route), or use an AIM portfolio service offered by a specialist wealth management firm which invests in the shares of companies quoted on AIM that meet the criteria for BR qualification. Providers of AIM IHT services will typically look for companies with sensible valuations that are self-sustaining and can generate cash, with the potential for further growth to generate shareholder value. They will also apply their usual filters such as whether the firm has a strong management team, a defensible position in its chosen market and a strong balance sheet. In short, although at the top level AIM can be volatile, BR managers want to invest in the steady performers that make up the backbone of the market. Managers look to construct a solid overall portfolio using conventional portfolio management strategies. The goal is to create sufficient diversification, to apply strong selling discipline, exit investments when they reach their estimate of fair value, or cut losses swiftly when they make mistakes. This means that providers of AIM IHT services must continually monitor their portfolio and react to any changes, including the potential listing of AIM shares on a recognised exchange: it is not unusual for some companies on AIM to take a dual listing on an overseas market to raise more capital and this would result in an otherwise BR qualifying share losing its qualification. The replacement business property rules help here, reducing the need to panic if the manager has to exit a particular holding. An estimated 50%-70% of the firms listed on AIM are BR qualifying and fund managers running AIM IHT portfolios often employ the services of external specialist consultancies to audit their portfolio and verify that it is BR qualifying – there is no official HMRC list of BR qualifying companies. Other managers use their own expertise. There are two types of AIM BR service: ACTIVE – run by an active fund manager who meets with companies prior to and during investment, with a view to generating superior performance. SMART PASSIVE – run by passive fund managers using advanced market screening techniques, seeking to create a lower risk/volatility model at a potentially lower cost than active services. Pioneered by TIME Investments, a number of quantitative metrics allow only those with a below market average volatility to be selected, aiming to remove market sentiment from the equation. The flexibility of purchasing shares allows easier diversification. In fact, AIM based services on average are over five times more diversified than the other BR investment types, typically investing in portfolios of 20 or more companies. In addition, the liquidity on AIM means that the service providers target the sale of shares within a month if investors wish to exit, although there is the caveat that this is dependent on market conditions. BR qualification of AIM firms 50% - 70% of AIM listed firms qualify for BR