29 February 24

Five considerations when accessing unquoted BR investments

Many advisers are aware of Business Relief (BR) through AIM-listed investments, but what about the opportunities in the unquoted sector? 

Inheritance Tax (IHT) receipts are set for another record-breaking year, according to the latest figures published by HMRC. The amount collected between April and October this year was £4.6 billion, roughly £0.5 billion more than the corresponding period last year.1  

It all means that, despite increased awareness among many clients, IHT is a financial planning issue that won’t be going away any time soon. This means that all types of estate planning should be considered, including investments that qualify for Business Relief (BR).  

Introduced by the UK government in 1976, Business Relief (BR) aimed to ease the transfer of family businesses down 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 BR can be made either in unquoted companies that meet the qualifying criteria, or in certain companies listed on the Alternative Investment Market (AIM). AIM, the junior market of the London Stock Exchange, is a market with great long-term growth potential, but AIM-listed shares can be volatile and are considered higher risk than those listed on the main market. 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 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 they focus on. 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.  

Two: How consistent have the returns been?  

One of the reasons clients may prefer unquoted BR options is because they don’t want their investment to experience the volatility of AIM. It’s therefore important to determine the target returns offered by the unquoted BR manager, and whether they have managed to achieve those returns over a consistent number of years. Some unquoted BR managers have been around for a significant amount of time, so it’s worth getting an understanding of whether they have managed to achieve consistent returns through full economic cycles as well as demonstrating resilience through major events, such as Covid, for example.  

Three: What is the experience and track record of the manager?  

How experienced is the investment manager? Does it have an established track record of managing investments that qualify for BR? The needs of clients can often change over time, so an investment in BR-qualifying companies must be flexible enough to continue to meet their needs throughout later life.  

One of the risks with investing into unquoted companies is the liquidity. Therefore, the manager’s track record of returning money to investors should also be looked into, as liquidity will be a key consideration for some clients. It’s worth asking what their liquidity target is and, more importantly, what their liquidity track record has been. Clients should know at the outset how long the manager takes on average to deal with any withdrawal requests. 

It’s also worth remembering that BR cannot be guaranteed; it is only granted by HMRC on a case-by-case basis after the death of the investor. It’s therefore worth asking managers how their BR-qualifying companies are managed to achieve BR, and whether the provider knows of any instances where HMRC has challenged the IHT-exempt status of a deceased client’s estate. Finally, given their experience and track record of managing unquoted BR-qualifying companies what does the manager consider to be their source of competitive advantage? 

Four: What corporate governance is in place?  

Advisers should have a reasonable understanding of the governance structure of the investment manager, as well as how governance of the underlying companies is undertaken. For example, what roles do the investment manager’s governance functions (Risk, Legal, Compliance) play in the design and running of the service? Do they have an Investment Committee? Can the manager describe how its trading activities are selected and monitored? 

Unquoted companies are harder to value, as the shares are not valued on an open market and they are not required to publicly disclose information on which valuations are based. Therefore, managers should be able to explain the methodology they use to value their book, as well as confirming whether those valuations are independently reviewed or verified.  

Non-Executive Directors (NEDs) can play a significant role in helping to ensure an underlying company is managed responsibility, while also giving independent oversight that the company is carrying out BR-qualifying trades. Where NEDs are in place, it is important to know their experience level and profile.  

Five: Customer service 

With any estate planning investment, communication is essential. Does the manager make their investment team available to advisers via webinars or update sessions?  

And of course, the investment is just the first undertaking. At some point the client will pass away, and it becomes the responsibility of their executor to ensure the investment and its proceeds are managed according to the client’s wishes. Managers should have experience of interacting with vulnerable clients and people who have recently been bereaved. It’s essential the manager understands the customer service-related aspects of their role and is committed to delivering the best outcomes at a particularly difficult time for those involved. 

All communications with bereaved families must be as clear, jargon-free and straightforward as possible, without being intrusive. This is why the best estate planning service providers will have dedicated teams available to help talk families and advisers through the next steps, and to answer any questions about the investment, claiming IHT exemption, or the probate process. In most instances, providers can release funds from the investment to pay an outstanding IHT bill to HMRC, so having the knowledge to facilitate this is essential.  

With a range of different estate planning providers to choose from, advisers need to match the right BR investment with the right client. In many instances, this will involve unquoted BR-qualifying companies where the investment manager has demonstrated they can deliver on the client’s investment objectives, doing so in a way that ensures their wishes are respected and met.  

Unquoted BR investments offer several benefits for estate planning clients beyond IHT exemption and retaining control over their wealth. It means they get to own an investment in a trading business that delivers returns that are uncorrelated to equity markets, and with a risk/return profile that suits their own personal objectives, managed by an experienced investment manager. It also means their money is being put to work in interesting and useful ways, perhaps providing capital to small or medium-sized enterprises, innovative start-ups, or unique projects in sectors like renewable energy, property development, and private and public sector lending and leasing.  

For advisers keen on guiding clients through the advantages of unquoted BR investments, we provide extensive support and resources. We offer customised client planning scenarios, host informative events and training sessions, and maintain accessible online portals. These resources are designed to enhance advisers' knowledge and simplify integrating unquoted BR investments into effective estate planning strategies. We’re happy to help. 



Tags on this post: adviser education, estate planning