Estate Planning Guide

55 54 ESTATE PLANNING OPTIONS ESTATE PLANNING OPTIONS This type of specialist BR estate planning product generally quote estimated target returns to investors of at least 3% per annum net of charges. Generally speaking, all of the investors in the service will be invested in the same broad portfolio of underlying shares or assets, although the timing of individual investor’s investment is likely to create some differences in underlying assets, depending on what is available when. This is in contrast to the more costly bespoke discretionary investment management service, where an individual portfolio of shares or assets is selected according to the client’s specific needs and objectives. The majority of managed investments into unlisted BR qualifying businesses are based on an onshore corporate structure but a small minority employs a Limited Liability Partnership or an offshore company structure. A small number of services offer insurance that is designed to pay out if, on the day the investor dies, the value of their portfolio is less than what was invested. Other services use insurance to cover the costs of the IHT liability if the policyholder dies within the first two years. However, these types of guarantees come at a cost and may be subject to exclusions. Some managers may also use derivatives to hedge portfolios against market downturns, as is common with many mainstream funds. This carries its own risks, such as counterparty credit risk and costs can also be significant, but are unlikely to be visible to end users. Unregulated Collective Investment Scheme (UCIS) A UCIS is structure in which 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. A small number of BR estate planning services are structured as UCIS and therefore they are subject to tighter rules around their distribution - they can only be promoted to sophisticated and high net worth investors. Where this is the structure, it’s worth advisers checking Professional Indemnity Insurance arrangements extend to this business. Listed Shares: AIM Portfolios The AIM is the London Stock Exchange’s international market for smaller companies. It comprises a range of businesses from young, venture capital-backed start-ups to well- established, mature organisations. 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, 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. While it is feasible for a client to self-invest on the AIM market, the careful stock picking, monitoring and the expertise in BR required mean that using a BR portfolio service is likely to be preferable for most investors. The number of managers offering AIM listed shares as part of a BR portfolio service has increased significantly since August 2013, when it became possible to hold AIM listed shares within an ISA. The following key points are worth noting: • AIM shares may prove to be high risk and the value of AIM shares may be subject to greater volatility than other investments. • In spite of the liquidity associated with quoted assets, AIM shares may prove difficult to sell and may not be sufficiently liquid for many clients, although many managers target exit within a month of an investor request. But, BR qualifying investments in AIM Listed shares can be passed to beneficiaries who may want to hold them for the long term. Consequently, the option of continuing to hold the shares in the event of a fall in the capital value or difficulty with liquidity is available. • AIM shares may not produce much in the way of income yield and the lack of income can be an issue for some clients. Nevertheless, a number of managers that build AIM-based BR portfolios do target growth and income and reasonable dividends can be found in some AIM listed companies. It should be noted that income reinvested from dividend income will be a new investment and the two- year holding period will apply to that part of the investment. • Not all shares listed on AIM qualify for IHT BR. Providers of AIM IHT services seek out companies at sensible valuation that can generate cash, with the potential for further growth to generate shareholder value. They will also look closely at the management team, balance sheet and its position in the market along with potential liquidity considerations. The goal is to invest in the steady performers that make up the backbone of the market, applying sufficient diversification to protect against potential failures. They must also continually monitor their portfolio and react to any changes, including the potential listing of AIM shares on a recognised exchange which would result in an otherwise BR qualifying share, losing its qualification. The three-year assets replacement window helps here, reducing the need to panic if the manager has to exit a particular holding. The initial investment for AIM based services tends to be lower than the other types of BR investments, suggesting that the flexibility of purchasing shares allows market entry and diversification at a lower cost. In fact, AIM based services on average are over three times more diversified than the other BR investment types, typically investing in portfolios of 20 or more companies. AIM Discretionary ISA Portfolio BR qualifying investments wrapped in an ISA are a great way to achieve both IHT exemption once the shares have been held for two years, and to exempt returns from the investment from IT and CGT during the investor’s lifetime. And while ISAs automatically lose their tax- free status on the death of the account holder, until recently, their surviving spouse or civil partner could claim an ’Additional Permitted Subscription’ (APS) that covered the value of their deceased partner’s savings as well as their own for that tax year. It should be noted, however, that any capital losses released within an ISA can’t be offset against an investors other capital gains as ISAs are exempt from CGT. It is still important to remember that AIM is the junior market and listing there is not the same as listing on the main market, and does not confer the same status, although the higher levels of scrutiny and corporate governance that would normally be associated with a listing apply.