BR Guide Second Edition

FIONA GRAHAM INSTITUTE FOR FAMILY BUSINESS Family businesses are unique. Their strong values and long term outlook mean they are the backbone of our economy, and the bedrock of our communities. In the UK family firms generate a third of GDP and employ over thirteen million people. By their very nature, family businesses take a long term view. Their commitment to passing something on to the next generation is locked into their DNA. It drives them to invest, innovate, and support the wider ecosystem in which they operate. Because family business owners plan for the long term, they also need stability over the long term when it comes to things like tax policy – particularly around IHT. Ensuring that these successful businesses are able to plan and continue to thrive after an ownership transition is important not only for the owners, employees and communities which rely on those businesses, but the UK economy as a whole. Business Relief (BR) is an absolutely crucial relief for family businesses. Ultimately, without BR, the death of a major shareholder could lead to the break up of otherwise successful businesses. Whilst IHT falls under the personal taxation regime, the reality is that the cost of paying the liability would fall on the business, as individual shareholders don’t have sufficient assets outside the business to meet the tax charge. So each time ownership passed from one generation to another businesses would either need to sell, break up the business or limit investment to be able to pay a hefty tax charge. BR is a great example of how tax reliefs can also support business growth, taking away a disincentive to grow. The introduction, and maintenance, of BR has given business owners the confidence to really focus their efforts on building their businesses and competing globally, rather than looking inwards and impeding growth to prevent risking the future of the business after their death. Some 85,000 family SMEs are expected to transfer ownership of their business to a new generation each year. Around 84% of family SMEs are estimated to be first generation businesses. BR supports these families in continuing to invest and grow under stable ownership, and successfully transitioning to the next generation. Family businesses have an incredibly positive impact on our economy. And they are ambitious to continue to adapt and grow, to create real growth over many decades to come. It’s essential that the tax environment continues to allow them to do that. Thought Leadership 31 BR INVESTMENT OPTIONS 30 BR INVESTMENT OPTIONS SUPPORTING GROWTH ACROSS GENERATIONS Underlying Asset Sectors In terms of underlying assets in unquoted/ unlisted estate planning services, the choice of these is primarily informed by three factors: the BR qualifying rules, the overarching capital preservation mandate and the investment objective: growth and/or income. The investment sectors currently covered by BR services are General Enterprise, Energy Generation, Financial Services, Industry & Infrastructure and Media & Entertainment. The majority of investment managers in BR are typically generalists (usually focused on AIM shares). Just over a third of the market over its history has been made up of specialist offerings, investing in an area of particular expertise (usually focused on unlisted assets), although, some do a bit of both. A generalist has a bigger universe of potential investment and more deal flow, so potentially more diversification. There is less chance of them struggling to place the money in the right opportunity, whereas specialists can leverage many years of relevant experience to find good value deals. They can also use their experience to help guide investee companies and they can afford to manage a smaller portfolio more closely to ensure it remains within the BR qualifying rules. SECTOR FOCUS BR managers look for sectors with assets for which there is a demand and which generate returns, whether or not they are held within a BR wrapper. The most popular sectors for those that benefit from defensive qualities along with non-correlated drivers. We look at these over the page. 3.4 ENERGY GENERATION 3% INDUSTRY & INFRASTRUCTURE 2% MEDIA & ENTERTAINMENT 2% FINANCIAL SERVICES 16% GENERAL ENTERPRISE 77% SOURCE: MICAP, JULY 2019 Sector composition across all open BR offers 77% GENERAL ENTERPRISE