Many financial advisers are aware of business relief through Aim-listed investments, but what about the opportunities in the unquoted sector?
Inheritance tax receipts are set for another record-breaking year, according to the latest figures published by HM Revenue & Customs. The amount collected between April and October 2023 was £4.6bn, roughly £0.5bn more than for the corresponding period in 2022.
This all means that, despite increased awareness among many clients, IHT is a financial planning issue that will not be going away any time soon. All types of estate planning should be considered, including investments that qualify for BR.
Introduced by the UK government in 1976, BR aimed to ease the transfer of family businesses down through generations without triggering costly IHT bills. Over the past five decades the scope of BR has expanded, making it a crucial IHT relief for both family businesses and investors in BR-qualifying companies.
Investments that qualify for the relief can be made either in unquoted companies that meet the qualifying criteria, or in certain companies listed on the Aim.
The Aim – the junior market of the London Stock Exchange – is a market with great long-term growth potential, and indeed the link between BR and Aim shares is well established, with many products on the market that are run as Aim IHT portfolios.
But the Aim has been a tricky and volatile place in which to invest in recent years, and while Aim shares are deemed illiquid, hence the reason they are eligible for BR. When it comes to estate planning, many clients may find they prefer unquoted investments that are still BR-qualifying but may have less volatility than shares listed on the Aim.
Therefore, if you are looking at unquoted BR investment options on behalf of clients, here are five key considerations that should form part of your due diligence process:
One: how diverse is the underlying portfolio?
While managers of BR-qualifying portfolios will invest in companies expected to remain eligible for BR, not all managers – or their portfolios – will be the same. When you look under the bonnet, the strategies employed will be different, as will the types of companies and sectors on which they focus.
Strategies in the unquoted BR sector vary from renewable energy, property development, and private and public sector lending and leasing, to name a few. Each has their own unique characteristics, risk-return profile and liquidity considerations.
It is therefore essential to understand the key asset allocations within these unquoted opportunities to avoid portfolio overexposure to one or two qualifying trades or sectors. This underlying diversification is important to help ensure returns are consistent, and that the company has enough liquidity to pay out income when required.
The risk is always that investments are chosen purely because they are eligible for the tax relief, with scant regard paid to the traditional investment principles of diversification and portfolio construction.
