AIM STRATEGY
CONTENTS Sheltering your assets for future generations 3 Introducing the Quilter Cheviot AIM Strategy 4 The Alternative Investment Market what is it? 5 The investment process 6 Benefits of the AIM Strategy 7 Client scenarios 8 Risks and who is eligible 9 Frequently asked questions 10 Schedule of charges 11 2
SHELTERING YOUR ASSETS FOR FUTURE GENERATIONS Beware the pitfalls of inheritance tax Many families and individuals build wealth during their lifetime to help see them through retirement and to pass assets on to the next generation. However, wealth can be eaten away once it reaches the level where inheritance tax (IHT) would be due. Traditional methods of offsetting inheritance tax 325,000 The first 325,000 of your estate is called the Nil rate band because it is taxed at 0% (as of July 2017). 40% In general, IHT is currently paid at 40% on any amount over 325,000 (as of July 2017). Trusts and gifts Tax savings can be achieved through trusts and gifts made during a person s lifetime. However, both these options mean losing control of the assets. And, in most cases, seven years must pass before the assets become entirely exempt from IHT. Trusts can also be complicated and expensive to set up and maintain. Transfers to your husband, wife, civil partner or to a charity are exempt from IHT. To recognise the value of a main home, a second nil rate allowance was announced in the 2015 Budget to be phased in between 2017 and 2021. This extra allowance only applies if your main home passes to direct descendants, and is subject to various other conditions, including a tapering away of relief for estates valued at more than 2m. Business Relief for inheritance tax Business Relief (which used to be known as Business Property Relief) was introduced by the UK in 1976 with the aim of sheltering certain business assets from IHT, including 100% relief for shares in unquoted trading companies. HMRC does not currently treat shares listed on the Alternative Investment Market (AIM) as quoted for the purposes of the relief, in part to provide an incentive for investors to hold AIM shares. If the company s activities qualify for relief and the shares are held for at least two years, the value of the shares will benefit from 100% IHT relief (subject to potential restrictions on the value of any excepted assets held by the company) at the time of your death. 3
INTRODUCING THE QUILTER CHEVIOT AIM STRATEGY The portfolios will contain a range of stocks. As the main aim is to make sure, as far as possible, that the overall value of the portfolio is sheltered to provide an inheritance, we consider these requirements ahead of any long-term potential performance when picking stocks to invest in. You can pass the investments direct to beneficiaries on death without them having to pay inheritance tax. The Quilter Cheviot AIM Strategy provides a professionally researched and managed portfolio of AIM-listed securities for those clients who want to shelter part of their estate from IHT. This can provide a significant saving for an estate, as seen from the case studies below. ESTATE WITHOUT AN AIM PORTFOLIO ESTATE WITH AN AIM PORTFOLIO -AIM + AIM Main home 500,000 Investment portfolio 500,000 Total estate 1,000,000 Less fixed nil rate allowance (325,000) Less 2017 Main home allowance (100,000) Total taxable assets 575,000 IHT @ 40% (230,000) Estate after tax 770,000 Saving nil Main home 500,000 Investment portfolio 400,000 AIM portfolio 100,000 Total estate 1,000,000 Less fixed nil rate allowance (325,000) Less 2017 Main home allowance (100,000) Less AIM Portfolio (100,000) Total taxable estate 475,000 IHT @ 40% (190,000) Estate after tax 810,000 Saving 40,000 The home allowance is available from 6 April 2017. 4
THE ALTERNATIVE INVESTMENT MARKET WHAT IS IT? AIM is the London Stock Exchange s international market for smaller, growing companies. Businesses joining AIM range from early stage, venture-capital backed to more established companies. Their aim is to access capital for growth. Launched in 1995, the AIM lists over 900 companies. Over 100bn (as at September 2017) 10 number of listed companies when AIM started in June 1995 959 number of listed companies in 2017 What are the advantages of investing in a portfolio of AIM shares? 1 2 3 4 5 6 7 Your investments can be traded and valued. It offers the opportunity to invest in younger businesses with potentially exciting growth prospects. You can spread your investment across sectors. You can take income or make withdrawals from your assets. You can hold an AIM portfolio within an ISA wrapper. You keep full beneficial ownership of the assets. It can help provide you with relief from Inheritance tax....to The average market capital of an AIM company has grown from 8.2 million in 1995 19.3% of stocks listed on AIM are international companies Companies from across all sectors are represented on AIM ++ 104.5 million in 2017 Since the financial crisis in 2008, over 764 companies have joined AIM, raising over 44 billion, or 100bn since inception Technology Healthcare Basic Materials Oil & Gas Financials Industrials Telecoms Utilities Consumer Source: LSE AIM summary statistics to September 2017 5
THE INVESTMENT PROCESS Alan McIntosh Chief Investment Strategist Investment research Quilter Cheviot has teamed up with the UK Mid & Small Cap Equities team at Old Mutual Global Investors to provide advice and research on suitable stocks for inclusion in the AIM strategy with the following attributes: Maintain sustainable revenues Demonstrate financial strength Demonstrate sufficient liquidity, so as to be relatively easily traded Uphold a positive investment outlook Diversify across industries Meet the requirements to qualify for business relief Research process Quilter Cheviot performs a screen on AIM listed stocks with a market cap of at least 150m and a free float of at least 50%. This list is then reduced to stocks that qualify for Business Relief (formerly Business Property Relief). These criteria reduce the list of stocks to 50. Old Mutual Global Investors then provides advice on which stocks remain, based on a brief regarding the characteristics of individual stocks sought for the portfolio. Implementation Portfolios within the Quilter Cheviot AIM Strategy will be invested centrally by the experienced Managed Portfolio Service team. Independent review of investee company selections The investment selections within the Quilter Cheviot AIM Strategy will be subject to an annual ongoing, independent review by tax experts engaged by Quilter Cheviot. This independent tax review examines the accounts of each company that has been selected by Quilter Cheviot for inclusion within our AIM Strategy portfolio and provides a summary of the extent of the availability of Business Relief. The reviewer s opinion will be based upon their examination of the latest set of accounts provided to them by each investee company at the time of the review. Investors should note that the final decision on whether the stocks qualify for Business Relief will always be made by HMRC at the time of probate, and will be based on the circumstances of the investee company at the date of death. Managing your portfolio We provide timely and regular clear client reporting. Regular reporting includes: A valuation of your portfolio; An annual tax summary to help your tax adviser; A performance report; A transaction schedule; and A commentary on market conditions. We will gladly provide interim reports if you ask for them. We will automatically register you in nominee name for added protection and convenience. Online Secure internet access allows you to view portfolios online whenever you want. This service provides access to printable valuations and transaction records. Old Mutual Global Investors (OMGI) UK Mid & Small Cap Equities team OMGI s UK small and mid-cap equities team believes that their universe of companies is less well researched than large companies, which results in share price inefficiencies. Daniel Nickols Head of Desk/ Fund manager Underlying the strategy of the UK Mid & Small Cap Fund is the team s ability to look for companies that can demonstrate financial strength and, therefore, maintain sustainable revenue growth. Additionally, companies should be the subject of regular upward earnings revisions and maintain a positive investment outlook. 6
BENEFITS OF THE AIM STRATEGY Provided investors are prepared to accept the higher levels of risk associated with investing in AIM listed companies, Business Relief qualifying investments can help satisfy a number of different criteria when compared to traditional estate planning options such as gifting assets or using a trust. Accessibility Control Simplicity Growth Potential It can take up seven years for a gift or asset held within a trust to be classified as being outside the original owner s estate for IHT purposes. However, a BR qualifying investment can be passed on at death free from inheritance tax, provided it has been held for at least two years and at the time of death. Settling assets into trust or gifting assets transfers ownership of the assets away from the original owner. However shares in BR-qualifying investments remain in the investor s name. Subject to the liquidity of the shares held within their AIM portfolio, AIM investors can ask to sell shares from the portfolio and have the proceeds returned to them, or they can set up regular withdrawals to meet changing needs, such as care home fees. The more traditional forms of estate planning can be complex; they will likely require the settlor or donor to take specialist legal advice and may on occasion require medical underwriting. Unlike gifts of cash or cash held in a trust, companies listed on the Alternative Investment Market provide investors with an opportunity to increase the IHT free portion of their estate through capital growth and the payment of dividends by companies held in their AIM portfolio. 7
CLIENT SCENARIOS In addition to the benefits highlighted on the previous page, there are other client scenarios where the QC AIM Strategy can help shelter your assets. Ageing clients or clients with health concerns It is natural that as we age or are unfortunate enough to suffer from serious medical conditions, we begin to consider how we can pass on our accumulated wealth to family and future generations. The older we are or the more serious a medical condition we may be facing, the more immediate becomes our need to make provisions for our estate. As we have seen, assets invested in Business Relief (BR) qualifying companies become exempt from IHT after a qualifying period of just two years. This contrasts with the seven years it takes for gifted assets or assets held in trust to become IHT exempt. The two-year qualifying period is less of an issue for clients intending to pass their assets to their surviving spouse or civil partner, as the two-year BR qualifying period is uninterrupted by the death of the original asset holder in those cases where assets are transferring between married individuals. An alternative to a discounted gift trust (DGT) Using a discounted gift trust will allow clients to place some of their investments outside their estate with immediate effect upon establishment of the trust, whilst still allowing an income stream to be taken from those investments. The amount taken out of the estate immediately (the discounted element), is determined by a health assessment and a fixed level of income to be taken as the trust is established. The healthier the trust settlor is and the larger the amount of income they decide to take, the more of their investment will immediately fall outside of their estate. The drawback is that the income that is to be taken is fixed at the outset. If the settlor requires additional income as their circumstances change, then it will have to be sought from elsewhere. Equally, if the settlor neither spends the income stream nor gifts it away, a discounted gift trust can become quite inefficient with unspent income received from the trust being gradually transferred back into the capital held within the settlor s estate. A discretionary AIM portfolio, whilst being subject to a two-year qualifying period that does not apply to a DGT, will in the medium term, provide a much greater degree of flexibility for income from the capital investment. When needed, the income drawn can be increased. When it is not required, any income received can be reinvested back in to the portfolio, thereby increasing the capital sum that can be passed on free of inheritance tax. Clients with a lasting power of attorney in place A variety of Court of Protection limitations exist upon court deputies or those holding powers of attorney (POA) for clients deemed unable to act in their own capacity. Deputies/POAs wishing to gift assets or settle them in to a trust are required to seek approval from the Court of Protection before doing so. This creates complexities for two of the traditional estate planning mechanisms that achieve their objectives by effectively removing the assets from the ownership of the donor or settlor. BR-qualifying investments however simply invest in shares, and remain the property of the investor. As such they do not contravene the deputy s obligation to always act in the client s best interest and will not require Court of Protection approval. Individuals holding powers of attorney for ageing relatives will also commonly be the intended inheritors of their relative s assets. The Court of Protection will look less favourably upon applications to make gifts or create a trust where the beneficiary of that gift or trust is also the person who is making the application to the Court Clients with significant Individual Savings Accounts (ISAs) After a lifetime of saving many clients will have built up significant sums in ISA accounts, providing them with tax-free income and capital growth from assets held within their ISA. However, an ISA does not afford similar protection from inheritance tax. With the introduction of new ISA rules in 2013, ISA investors are now allowed to hold shares in small companies listed on the Alternative Investment Market. This could potentially provide AIM ISA investors with a double tax break the usual income and capital benefits available for assets held in an ISA and the potential for business relief from an IHT liability, once the two-year qualifying period has passed. 8
RISKS AND WHO IS ELIGIBLE Risks to consider You should be aware of the higher levels of risk associated with investing in smaller companies, and be willing to adjust your attitude to risk in line with this. There is a less readily available market for investments in smaller companies. This can make selling investments more difficult. The advantages of investing in a portfolio of AIM stocks depend on the existing tax rules in force. Any benefits gained from maintaining AIM stocks in a portfolio could be negatively affected by any future changes to those tax rules. Investing in smaller companies and those involved in niche sectors, such as new technology or alternative energy, will often see price movements that are above average. Price changes can be greater than those experienced by investments held in companies with a full listing on the London Stock Exchange. Smaller companies usually rely on a smaller management team. Losing any one individual from the management team can have a greater negative effect on a smaller company s performance. Factors to consider The service will only benefit those investors with estates that could be higher than the then current level of IHT-free allowances. The service is not recommended for any purpose other than sheltering assets from inheritance tax. As Business Relief rules require investments to be held for at least two years, you must have held investments in a qualifying portfolio for at least two years on death to qualify for IHT relief. This strategy may not be suitable if you do not live in the UK. We would recommend that any non-uk resident individuals who are concerned about their UK IHT exposure discuss the appropriateness of this strategy with their tax adviser in the first instance. You need to invest at least 100,000 in the Quilter Cheviot AIM Strategy. As long as an investment qualifies for Business Relief and is held for the minimum two-year period, inheritance tax would not be charged on the value it represents. By their nature, smaller companies often specialise in particular sectors as they target their products and services at a narrow range of consumers. Any small changes on the market place is likely to have a significant impact on the company s performance. Bid (buying) and offer (selling) price differences for AIM quoted companies will often be greater than those on the full London Stock Exchange. Selling a holding shortly after buying it may result in the seller receiving back less than the initial amount they invested. As with any investment portfolio, your capital (initial investment) is at risk and sale proceeds may not always be greater than your initial investment. 9
FREQUENTLY ASKED QUESTIONS Can I switch investments within the portfolio? To qualify for Business Relief and so get inheritance tax relief, you must hold the investments for at least two years. This does not mean that individual companies within the portfolio have to be held for two years. It does mean that if a qualifying shareholding is sold, you should reinvest the proceeds within the portfolio into another qualifying shareholding. Please note that proceeds would need to be reinvested into qualifying stocks within 3 years of the date of sale to ensure that the 2 year clock is not reset. Within the portfolio, we would always seek to ensure that funds are reinvested more immediately in any case to avoid an at risk period while cash is held (see below). As long as you keep to this approach, the qualifying period does not restart, and the ownership period of the new shares will be considered to include the period during which the old shares, which they are replacing, had been held. To ensure qualification for relief, we would recommend that shares are retained until death (shares gifted in lifetime within 7 years of death may still qualify but this is subject to more restrictive requirements for the recipient). Can I hold the AIM strategy in an ISA? Yes, you can hold AIM shares in an ISA. You can transfer an existing ISA to us and top it up each year, as well as hold investments in a non-isa account. How is cash in the portfolio treated? Cash that you may hold at the time of your death within the portfolio does not qualify for IHT relief. Initial investments in the portfolio will take place promptly to make sure that the qualifying period for invested assets can start as soon as possible. When you sell assets from the portfolio, a replacement investment in a qualifying asset will be made as soon as possible. This will ensure that as little time as possible is added to the qualifying period. In all cases, we will sell and buy assets for the portfolio as soon as possible in terms of converting them into cash and market conditions. The aim is to avoid holding cash positions for an extended period of time. How is income treated? We can pay out income in the form of dividends to you, or we can reinvest it. We can pay out dividends every month or every three months by standing order. We assess any reinvested income separately from its parent shareholding for qualification under the two-year minimum holding period. The two-year period starts from the point at which the income is reinvested and not at the date you bought the parent shareholding. Can I withdraw funds from the portfolio? You can withdraw funds from the portfolio at any time, although if you do it will reduce the amount of IHT relief that may be available. The timing and value of withdrawals may also be affected by the current sale price of the shares in the portfolio and the fact AIM shares are harder to convert into cash. What happens to the portfolio when I die? Before the end of the two-year holding period If you die before the end of the two-year holding period, the portfolio can be transferred to your husband, wife or civil partner and the two-year period will continue without the need to restart after the transfer. If the portfolio cannot be transferred to a surviving husband, wife or civil partner, inheritance tax will be charged on the assets within the portfolio on the same basis as any other assets held by the estate. After the end of the two-year holding period Once the two-year holding period is complete, the equity investments in the portfolio should qualify for full relief from inheritance tax and so reduce the tax the estate will have to pay. The final decision on whether the stocks qualify for Business Relief will always be made by the HMRC at the time of probate. Please note also that relief can be restricted where any of the investee companies at the date of death are holding excepted assets, broadly speaking investment assets not required as part of their business, so in some cases the relief may not be available in full. Once probate or letters of administration have been granted, the shares can be sold or transferred to beneficiaries. Please note that despite the IHT relief, in any of the above circumstances the assets will pass on death at market value, meaning that any capital gains inherent in the shares will be eliminated on death. 10
SCHEDULE OF CHARGES Discretionary Asset Management Charges for use with AIM strategy Portfolio Initial charge An initial charge of 1.00% based on the value of your portfolio is applied when the account is opened and is subject to VAT. For cash and stock transfer charges, probate fees and current interest rates see www.quiltercheviot.com/ fees-and-charges. Annual management charge Our annual management charge of 1.25% is based on the value of your portfolio (including ISAs where applicable) at each month end, averaged over the charging period. It is charged quarterly in arrears at the end of March, June, September and December and is subject to VAT. From this fee we pay Old Mutual Global Investors a payment to cover their research and investment management services. IMPORTANT INFORMATION You should remember that the value of investments, and the income from them, can go down as well as up and that past performance is no guarantee of future returns. You may not get back what you invest. The benefits of the Discretionary Managed AIM Strategy are based on current tax rules continuing for as long as you hold the portfolio. Levels and bases of tax can change. The examples in this document are a simplified summary of the relevant tax rules. As a result, you should speak to a professional tax adviser on all tax matters. Nothing in this document constitutes investment advice or tax advice, it is not a solicitation or an offer to buy or sell any security. The information on which the document is based is deemed to be reliable, but we have not independently verified such information and we do not guarantee its accuracy or completeness. The securities and investment services discussed in this document may not be suitable for all recipients. Investors should evaluate particular investments and strategies and seek the advice of a financial adviser. Quilter Cheviot Limited is a private limited company registered in England with number 01923571, registered office at One Kingsway, London WC2B 6AN. Quilter Cheviot Limited has established a branch in Dublin, Ireland with number 904906, is a member of the London Stock Exchange, is authorised and regulated by the UK Financial Conduct Authority, is regulated by the Central Bank of Ireland for conduct of business rules, under the Financial Services (Jersey) Law 1998 by the Jersey Financial Services Commission for the conduct of investment business in Jersey and by the Guernsey Financial Services Commission under the Protection of Investors (Bailiwick of Guernsey) Law, 1987 to carry on investment business in the Bailiwick of Guernsey. Accordingly, in some respects, the regulatory system that applies may be different from that of the United Kingdom. 11 QCB001 (11/2017)
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