Estate planning should be seen as just one part of a comprehensive later life plan. And business relief (BR) solutions should be approached as an investment service in their own right – not solely considered as a tax solution.
Advisers should remember not to let the “tax tail wag the investment dog.”
When it comes to undertaking BR due diligence, we have six golden rules advisers can use to position their clients for the best possible outcomes for both estate planning and later life.
Strong Performance is crucial
Estate planning is about leaving the most to our chosen loved ones as a legacy. Individuals should therefore plan to maximise the wealth they will have to ultimately pass on to their beneficiaries, while considering any potential needs, such as home improvements or travel, as well as the possibility of needing to pay for care one day. As well as helping to meet any needs, strong growth is also a key weapon to counter the negative forces of inflation, so seeking a steady, long term, meaningful return is always crucial.
Keep costs to a minimum
Costs are another guaranteed negative force on investment returns and so should be minimised. Lower costs can also reduce risk. A manager with lower fees doesn’t need to chase extra risk to cover these costs before delivering on their specified or target return, which is calculated once fees have been deducted. In addition, high costs can indicate the investment is not delivering best value to the investor, but that instead the manager is taking the significant benefit.
Understand all factors affecting the trading activity
BR investments are investments into underlying portfolio companies, which can carry out a wide variety of BR trading activities. These companies and the markets in which they operate should be clearly understood by the adviser. BR companies tend to either own and operate assets or carry out a lending trade. Some do both.
Broadly speaking, those with a higher proportion of their portfolio in physical assets will see their fortunes depend on the performance of those assets and will fluctuate on the fundamentals of the sector. Those more focused on lending should see more steady returns as they will have lent money at normally fixed rates and any market fluctuations should have less impact. The associated risks of both routes, including their sector, liquidity and valuation risks, vary widely between strategies. This should all be considered in the context of the investor. Are the trading strategy and associated risk appropriate for their profile?
Know what it’s worth
When making any investment, it is crucial to purchase the asset at the correct price, taking into consideration the potential future sale value. For BR, there are two main considerations.
The first is being aware of the methodology undertaken by the manager when calculating the net asset value (NAV) of the service. Owned assets tend to be more complex to value, are reliant on many variable assumptions and have more potential for subjectivity. Valuations that appear not in line with current market fundamentals or with similar services, should be assessed carefully. Lending services tend to be more transparent and less subjective to value.
The second consideration is whether the share price for incoming investors is trading at a premium to the audited NAV. If so, this should be reviewed, as it means the investor is taking on extra ‘valuation risk.’
Ensure tax-efficient access
Investors in later life do not normally wish to give up control and flexibility of their wealth to achieve estate planning or investment objectives. It can be an uncertain time and being able to adapt is key. But any access to this capital should be managed in a tax-efficient way, considering capital gains tax (CGT). One way to do this is through investing with a manager that only offers newly issued shares, rather than using matched bargains. Such shares, after a three-year holding period, should qualify for investors’ relief, capping CGT on any disposal at 10%, rather than the potentially higher 20%.
Seek maximum utility
One in three people aged 85+ require some form of care. As well as making the most of any investment, later life planning should seek to provide further utility, for instance, in the preparation for potential care needs. By considering the potential cost of care and practically pre-planning to meet any care needs, the investor will be equipped to make the right choices should this issue arise.
If advisers want their clients to get the most from any BR service they recommend, the use of these rules should help ensure the optimal outcome.
Matt Dickens is senior business development director at Ingenious