No one could call them household names: Fern Trading, Averon Park, Elm Trading, Bagnall Energy, TP Leasing. So this may surprise most people: that these sorts of enterprises make up one of Britain’s raciest growth sectors, today with assets under management easily topping £10 billion. And, to boot, that they’re killing the Alternative Investment Market, or Aim.
The go-go sector in question? Private business relief schemes built to enable their investors to dodge inheritance tax (IHT). The market has broadly doubled in size over the past four years, largely at the expense of Aim, and lately fuelled by the IHT changes in Rachel Reeves’s two budgets that came into force this month and skewed tax policy the schemes’ way.
As the tax expert Philip Hare puts it: “The government may not have foreseen the consequences of these changes.”
It is a point City firms, led by Whitman Asset Management, have been making to the Treasury and HMRC, while highlighting another risk: that the government is potentially harbouring a mis-selling scandal, affecting thousands of elderly people, should there be any sudden change to the IHT rules.
The schemes insist they are doing a social good. Octopus Investments, the manager of the biggest, Fern Trading, which it values at £3.4 billion, says it produces “3.2 per cent of the UK’s solar energy” and 1.5 per cent of its onshore wind, adding that business relief plays a key role “in directing long-term capital to where it is most needed: strengthening the UK’s infrastructure, supporting growth and advancing its industrial priorities”.
Downing, the manager of Bagnall Energy and Pulford Trading, together with almost £900 million of net assets at the latest accounts, says it “focuses on managing a diversified portfolio of UK-based businesses and assets that deliver essential services”.
The private schemes say they are promoting much-needed infrastructure projects such as wind farms OLI SCARFF/AFP/GETTY IMAGES
But some City firms argue that the schemes are both opaque and an abuse of taxpayers’ money. Why should the public purse be financing a fee bonanza for scheme promoters, now collectively heading for at least £1.5 billion, all to deliver something the private sector is doing anyway: small-scale green energy projects, property assets, ultra-safe lending?
Paul Jourdan, chief executive of Amati Global Investors, says: “I would maintain there’s little public benefit from these schemes. If they didn’t exist, nobody would miss them. They’re pure tax creations.”
As the manager of Aim and smaller company funds, he accepts that people may say he is talking his book. But he draws a big contrast to the IHT tax breaks for Aim, which he says “was a 30-year investment by successive UK governments in a small company financing ecosystem”.
“The trade-off on Aim is that we created probably the best small company stock market in the world for sub £500 million businesses,” he adds, with the tax-breaks “incentivising risk”. These private schemes, Jourdan says “are designed to take minimal risk”, with investors’ cash now being “diverted to assets which other risk capital has built or which simply replaces bank lending”.
Business relief is a UK tax incentive on qualifying assets, such as shares in private trading companies or Aim stocks, that reduces or eliminates 40 per cent IHT if held for at least two years and at the time of death. As Hare notes, it was introduced in the 1970s “to help people pass down family businesses without selling up”, before being extended to Aim in the 1990s.
Historically, investors had two main options: private business relief schemes or Aim stocks, including portfolios of qualifying companies, managed by the likes of Quilter Cheviot, Charles Stanley, Canaccord and Whitman.
For years, they offered the same IHT breaks. But this month, the government created a two-tier system. For the unquoted assets in private schemes, individuals will have full relief up to £2.5 million (or £5 million when allowing for transfer between spouses), after which the rate of relief is halved. But for all Aim shares, relief has been halved, resulting in an effective IHT rate of 20 per cent.
The upshot? A big switch in the flow of funds. James Rae, head of inheritance tax at Charles Stanley, says: “Since the chancellor’s announcement downgrading business relief on Aim shares, we have observed clients reallocating funds away from Aim and into unquoted business relief schemes. This risks diverting capital from the innovative Aim companies that support UK growth and jobs.”
Another asset manager added: “I’d estimate that over the past 12 months, £600 million has gone out of Aim and £950 million into these private business relief schemes.”
After Fern, from which Octopus has taken out about £900 million in fees since its inception in 2010, the second biggest is the Foresight Group-managed Averon Park, with £1.9 billion net assets at the latest accounts. In addition, there is Elm Trading, a £1.5 billion fund run by Time Investments; the Navigator Trading and TP Leasing schemes managed by Triple Point, together with £1.1 billion net assets; the two Downing products and some smaller schemes. All are thought to have grown since their latest accounts. Some managers also offer Aim IHT funds.
All do similar things: create a private trading company, with operating activities that qualify for business relief. These are typically asset-backed, low-risk investments with predictable cash-flows, often acquired after the risky construction phase: wind and solar farms, care homes, broadband fibre, plus small company lending.
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The manager issues new shares in the private company to investors looking to shelter IHT, offering protection plus 2 per cent to 4 per cent returns. Shares are bought and sold on a “matched bargain” basis. As Jourdan puts it: “Take minimal risk and allow the money to get in and out as smoothly as possible. And, you know, pass on some of the return to the investors, but they’re really just there for the tax relief.”
The schemes are proving popular. But critics point to various issues. The share price, which invariably goes up, is an internal construct, effectively determined by the manager as new buyers replace those who die. Revolving credit facilities maintain liquidity should sellers periodically outweigh buyers, so there is no need to sell assets to meet redemptions. The upshot? There’s no real market-testing of the value of schemes’ assets.
Critics point out that Octopus’s Fern, which had pre-tax losses of £420 million last year, has a £3.4 billion valuation that far exceeds its £2.16 billion net assets. That’s despite having more than £1 billion of net debt and being full of solar, wind and fibre holdings, a portfolio that would trade at a big discount to net asset value (NAV) on the public markets.
This mismatch was driven home in 2024 when Foresight used Averon Park to acquire a publicly quoted business that it managed: the Foresight Sustainable Forestry Company. It had been trading at a near 30 per cent discount to NAV. But Averon paid £176 million: a one-third premium to the share price and not far off net asset value.
This valuation discrepancy has been raised with both the Treasury and the Financial Conduct Authority. Some City firms argue that the schemes are just one big IHT rule change away from a blow-up, affecting thousands of old people. What would happen, they ask, if they all wanted their money back at the same time? It’s hard to sell a wind farm in a hurry. So isn’t there a risk that the schemes would have to sell illiquid, potentially overpriced assets at a hefty loss?
To this, Time Investments says: “All assets acquired by or constructed by Elm Trading are independently valued by sector specialist valuers” — a point echoed by other schemes. They all argue, too, that they’re a boon to society.
Triple Point says its two schemes “deploy productive private capital into parts of the UK economy where access to finance has structurally declined”, supporting “over 100,000 SMEs [small medium enterprises]”. Foresight says that in the past financial year, Averon Park “generated 434 gigawatt hours of clean energy”, enough to power 149,575 UK households.
Even so, City firms calculate that the government is now effectively bankrolling these tax-avoidance schemes by as much as £800 million a year. Jourdan says: “We’re all taxpayers. The government could be something like £800 million a year better off by closing this loophole. It’s easy to do by making the tax relief conditional on taking risk. Not to do this while continuing to raise taxes on business and penalising wealth creation makes no sense.”