BR report 2018

52 53 “We are very positive about the future of the BR market – it is growing and developing quickly. There are more providers coming into the market and that can only be a good thing as it will mean more choice for investors.” — SAM McARTHUR, PUMA INVESTMENTS If you do a trust or a gift, then after seven years you’ve not done anything for the UK economy, but you’ve saved 40% tax. With BR, yes you save 40% tax, but only because you’re helping the economy. That sits more favourably with clients as they feel that they are giving something back. Do we foresee any changes to BR? If the government does a really good review and sees how well it’s working, I think it will be left alone. People look at BR as a two year investment but, if you look at the average investment, it’s a lot longer than two years as it still has to be held at the time of death. Their money’s being pumped into the UK economy creating all these jobs and taxes, and the government doesn’t lose money until the last possible second - it’s a genius tax relief. When you look at how much tax is being generated from the underlying companies, take construction for instance, every penny you invest in construction creates almost three for the UK economy. We also have a housing shortage, so it’s a no brainer for the government to back this. SH: The government seems to be focused on reducing complexity and simplifying the rules. They have referenced the residence nil rate band as being an example of that. I can’t imagine for a moment that they will want to reduce the amount of tax they collect through IHT, so it would appear that the review is more about simplification. The worst case scenario would be that BR ceases to exist, although this seems unlikely given that the government and Treasury have shown their support for it. Clearly in that kind of scenario, lots of people would look to redeem their money at the same time, and liquidity in the underlying investments would be paramount. That is one of the main reasons we have a high degree of asset backed lending, because you would avoid the issue of trying to sell physical assets in a depressed market. SJ: There’s still considerable complexity in IHT legislation. One of the areas we’ve been providing a lot of training around has been the residence nil rate band, which is still causing significant confusion. We would welcome simplification of aspects like the taper threshold and general exemptions. But from a BR perspective, our view is that it has a strong economic rationale, and it’s legislated for in a straightforward manner. For that reason, we don’t expect any wholesale changes to BR. BT: The worst case scenario would be more complexity, or tinkering around the edges of the rules. All that does is tend to knock people’s confidence in them. When we look at our investments, the tax relief is always a positive attribute, but they have to stand up as businesses in their own right as well. JF: I don’t think there are many people in the UK that wouldn’t welcome tax simplification. There are certain areas of IHT that stand out as more of a priority for simplification than others. The detail around relief on gifts can be poorly understood, and the residence nil rate band is pretty complicated, although quite new. In the Inheritance Tax Act, BR is probably one of the most straightforward sections and has changed very little since it was expanded to apply to minority interests more than 20 years ago. This is really important because BR is something that investors typically only benefit from when they die. It’s a bit like pensions – if you want the rules to incentivise people to make investments, then they need to have certainty that the rules are going to remain the same for a long time in order for it to form part of their risk/reward assessment at the outset. The importance of this stability should not be underestimated in how much take up there’s been of investors wanting to move their wealth towards higher risk investments such as AIM listed and unlisted shares. Any change to BR should be incredibly careful and considered, because even a well- meaning change could have unintended consequences if it calls into question the stability of the relief. IF THERE WAS A MAJOR CHANGE IN BR LEGISLATION TOMORROW THAT REQUIRES ALL UNLISTED BR QUALIFYING INVESTMENTS TO BE SOLD, HOW WOULD YOU LIQUIDATE YOUR INVESTMENTS AND WHAT DISCOUNT TO NAV WOULD YOU ANTICIPATE HAVING TO SUSTAIN? SM: We believe that all advisers should be asking themselves this when considering a BR qualifying offer for their clients. We “There seems to be a slight nervousness over using BR because it’s investing in shares. Once we get the opportunity to talk to advisers and explain how we’re doing those investments, they become more comfortable with it.” — BELINDA THOMAS, TRIPLE POINT consider our unlisted investment strategy to be one of the most liquid strategies that is currently available to advisers. Puma Heritage’s trade is first charge lending only, and those loans are all short dated. At any one time, we will know exactly what the maturity profile of the Puma Heritage lending book is. As at today’s date around 30% of its loan book will be repaid in the next three months. A further 32% will be repaid between 3-6 months from now. So in six months we would have over 60% of all money back without doing anything and without any discount to NAV. The remaining 40% will be repaid between 6 and 24 months. Puma Heritage does not currently have a loan with a tenor of longer than 24 months in its loan book. The market for real estate lending is very big and very liquid. There are lots of participants from the biggest banks right down to the small alternative lenders. If there was a requirement to exit the loan book quicker than the natural liquidity profile, there are many options available to us as Trading Adviser to Puma Heritage. SH: In my response to the previous question I mentioned that this would be the worst case scenario and the one which would polarise the market. Those providers who have chosen to follow trading strategies which involve a high degree of fixed, or physical assets would clearly have to sell those in order to liquidate the investments. With the amount of money sitting in these types of assets it is highly likely there would be over supply in the market resulting in depressed values. Advisers who have been around for a while will be well aware of the problems which occurred in the commercial property market and I know this is one of their major concerns when considering BR investments. Our focus on asset backed lending, and the fact that we have diversification across industry sectors, means that we have a well- diversified loan book which provides liquidity. It would not take long comparatively for the loans to be repaid and funds returned to investors without having to significantly discount their value. BT: We can do one of two things – we can either leave both businesses to run off and not enter into any further contracts. As at 31 December for TP Leasing Limited over 50% of the book would have turned to cash within 12 months and for Navigator Trading Ltd it was 59%. Or we could sell the underlying business as there is an active market for these leases and loans. Even during the height of the credit crisis, we could have easily sold our TP Leasing Ltd portfolio as the government backed cashflows are particularly desirable. Selling the books may mean a small reduction in the value, but we would not expect this to be substantial given the credit quality of the cash-flows in both companies. In either instance, the return of capital to shareholders would be relatively swift and clearly the communication to investors would be of paramount importance. We have a number of investors who see the achievement of BR as being an additional benefit but not the primary aim. Their holding is for the returns from the business themselves which are not correlated to the equity markets, so would not seek to exit should the BR rules be altered. LC: Firstly, we don’t anticipate changes that drastic! It wouldn’t be logical to introduce legislation that forced the sale of all unlisted BR qualifying investments. If the investments somehow became non-qualifying for BR then the fund itself should stand up as an investment proposition. We understand the primary reason it’s being done is the tax relief, but it ought to stand up on its own. Target capital growth of around 4% p.a. – over the medium term – in our unlisted service are attractive in the current low interest rate environment and we’re not sure that everyone would want to exit the fund. Clearly some people would, but they’ve got to put their money somewhere else. There’s got to be something else that looks equally attractive and complementary to existing investments. If IHT was abolished, yes of course you would see people moving their money, but I don’t think there would be a rush to the door. “The great thing about BR is not only does it incentivise investors to hold their investment for the longest time possible until they pass away, but it also means investors are not incentivised to move away from the underlying company if the AIM market goes through unfavourable market cycles.” — JESSICA FRANKS, OCTOPUS INVESTMENTS JOHN SCHAFFER DOMINIQUE BUTTERS LAURENCE CALLCUT SIMON HARRYMAN SAM McARTHUR JESSICA FRANKS BELINDA THOMAS SAM JERMY