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The private schemes say they are promoting much-needed infrastructure projects such as wind farms OLI SCARFF\/AFP\/GETTY IMAGES<\/p>\nNo 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\u2019s raciest growth sectors, today with assets under management easily topping \u00a310 billion. And, to boot, that they\u2019re killing the Alternative Investment Market, or Aim.<\/p>\n
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\u2019s two budgets that came into force this month and skewed tax policy the schemes\u2019 way. <\/p>\n
As the tax expert Philip Hare puts it: \u201cThe government may not have foreseen the consequences of these changes.\u201d<\/p>\n
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.\u00a0<\/p>\n
The schemes insist they are doing a social good. Octopus Investments, the manager of the biggest, Fern Trading, which it values at \u00a33.4 billion, says it produces \u201c3.2\u00a0per cent of the UK\u2019s solar energy\u201d and 1.5\u00a0per cent of its onshore wind, adding that business relief plays a key role\u00a0\u201cin directing long-term capital to where it is most needed: strengthening the UK\u2019s infrastructure, supporting growth and advancing its industrial priorities\u201d.\u00a0<\/p>\n
Downing, the manager of Bagnall Energy and Pulford Trading, together with almost \u00a3900 million of net assets at the latest accounts, says it \u201cfocuses on managing a diversified portfolio of UK-based businesses and assets that deliver essential services\u201d.\u00a0<\/p>\n
The private schemes say they are promoting much-needed infrastructure projects such as wind farms OLI SCARFF\/AFP\/GETTY IMAGES<\/p>\n
But some City firms argue that the schemes are both opaque and an abuse of taxpayers\u2019 money. Why should the public purse be financing a fee bonanza for scheme promoters, now collectively heading for at least \u00a31.5\u00a0billion, all to deliver something the private sector is doing anyway: small-scale green energy projects, property assets, ultra-safe lending?\u00a0<\/p>\n
Paul Jourdan, chief executive of Amati Global Investors, says: \u201cI\u00a0would maintain there\u2019s little public benefit from these schemes. If they didn\u2019t exist, nobody would miss them. They\u2019re pure tax creations.\u201d\u00a0<\/p>\n
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<\/a> tax breaks for Aim, which he says \u201cwas a 30-year investment by successive UK governments in a small company financing ecosystem\u201d.\u00a0<\/p>\n \u201cThe trade-off on Aim is that we created probably the best small company stock market in the world for sub \u00a3500 million businesses,\u201d he adds, with the tax-breaks \u201cincentivising risk\u201d. These private schemes, Jourdan says \u201care designed to take minimal risk\u201d, with investors\u2019 cash now being \u201cdiverted to assets which other risk capital has built or which simply replaces bank lending\u201d. <\/p>\n 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 \u201cto help people pass down family businesses without selling up\u201d, before being extended to Aim in the 1990s.<\/p>\n Historically, investors had two main options: private business relief schemes or Aim stocks<\/a>, including portfolios of qualifying companies, managed by the likes of Quilter Cheviot, Charles Stanley, Canaccord and Whitman.\u00a0<\/p>\n 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 \u00a32.5\u00a0million (or \u00a35\u00a0million when allowing for transfer between spouses),\u00a0after which the rate of relief is halved. But for all Aim shares, relief has been halved,\u00a0resulting in an effective\u00a0IHT\u00a0rate of 20\u00a0per cent.\u00a0<\/p>\n The upshot? A big switch in the flow of funds. James Rae, head of inheritance tax at Charles Stanley, says:\u00a0\u201cSince the chancellor\u2019s 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.\u201d<\/p>\n Another asset manager added: \u201cI\u2019d estimate that over the past 12 months, \u00a3600 million has gone out of Aim and \u00a3950 million into these private business relief schemes.\u201d<\/p>\n After Fern, from which Octopus has taken out about \u00a3900\u00a0million in fees since its inception in 2010, the second biggest is the Foresight Group-managed Averon Park, with \u00a31.9\u00a0billion net assets at the latest accounts. In addition, there is Elm Trading, a \u00a31.5\u00a0billion fund run by Time Investments; the Navigator Trading and TP Leasing schemes managed by Triple Point, together with \u00a31.1\u00a0billion 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.\u00a0<\/p>\n 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.\u00a0<\/p>\n Business newsletter<\/p>\n The business editor\u2019s exclusive analysis of all the latest financial and economic news.<\/p>\n \t\t\t\t\tSign up with one click<\/p>\n 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 \u201cmatched bargain\u201d basis. As Jourdan puts it: \u201cTake 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\u2019re really just there for the tax relief.\u201d<\/p>\n 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\u2019s no real market-testing of the value of schemes\u2019 assets.\u00a0<\/p>\n