Helping your clients preserve their legacy
Due to the high risk nature of this service, it is only available through a qualified financial adviser.
Inheritance tax (IHT) has been called the 'voluntary tax'. The Office for Budget Responsibility (OBR) expects IHT to raise £5.3 billion in 2019-20. Sound financial planning could divert much of this to loved ones instead of the taxman.
The Close Inheritance Tax Service (CITS) is a specialist, discretionary investment management service designed to provide accelerated relief from IHT by investing in Business Property Relief (BPR) qualifying shares quoted on the Alternative Investment Market (AIM) and the NEX Exchange Growth Market.
Providing each investment in the portfolio has achieved a two year holding period at death, all the capital invested and any growth in qualifying-shares will achieve BPR and therefore will not be subject to IHT**.
CITS is one of the longest running AIM-based IHT services on the market, and the Service has a successful track record. Since its launch in March 2001, it has proved effective in protecting clients’ estates from IHT.
- Relief from IHT in as little as two years
- Clients keep control of (and access to) capital
- No complex or costly legal structures
- Eligible for ISA investment
- A client’s power of attorney can choose this as an investment-based solution
Following the two year holding period, the investment can be gifted to discretionary trusts without being considered a ‘chargeable lifetime transfer’.
According to the London Stock Exchange, AIM is the most successful market for smaller and growing companies in the world. Since its launch in 1995, over 3,600 companies from across the globe have chosen to join AIM. There are over 900 companies listed on AIM with a total market value of circa £100 billion; the average size of an AIM company is around £100 million. A listing on AIM was once seen as a stepping stone to a full listing, but it has since become the market of choice for many well-known companies, including ASOS and Fevertree. Read about the myths of investing in AIM.
The NEX Exchange Growth Market is a London-based stock exchange with around 80 companies listed. Their average market capitalisation is circa £20 million and well-known companies include Shepherd Neame and Newbury Racecourse.
Source: London Stock Exchange, 31 March 2019
To achieve a beneficial tax status by capitalising on Business Property Relief (BPR)*
To preserve capital** and achieve growth over the long-term within the context of BPR
To diversify risk
*A company that qualifies for BPR at the time of investment may cease to qualify for reasons outside our control at a later date, which means any tax benefits will be lost until the capital is reinvested in BPR qualifying company. **This is not a capital protection service and your client’s capital is at risk.
- Thorough balance sheet analysis
- Regular management meetings and site visits – over 300 per year
- In-house discounted cash flow (DCF) modelling
- 25-35 holdings in each portfolio
- Spread across a broad range of sectors, industries and (where possible) geographies
- Targeting reduced stock and sector specific risk
- Monitor on-going BPR qualification using external tax advisers
- Manage down overweight positions where appropriate
- Sale of holdings where fundamental view has changed
What we look for in companies
- Financial structure: a strong financial position, visible earnings, robust cash flow and growing dividends
- Market position and customer base: a long trading history, blue chip customers, access to niche markets, strong brands and market leaders
- Other considerations: strong management, under-researched companies and those uncorrelated to the performance of other assets
How we find them
We utilise an extensive network of broker contacts combined with regular market screening to identify potential investment opportunities.
Our discounted cash flow (DCF) process
We generate fair value estimates on current and target holdings by running DCF models based on conservative growth estimates. These are used to help guide investment decisions.
DCF models are generated for all holdings. We see cash generation as a key component in stock picking for clients, as it allows us to assess the underlying profitability of companies before we consider making an investment. Our process includes the following:
- We carry out our own proprietary research into existing and potential holdings
- In the post-MIFID II market, there is less independent smaller companies research
- We use our own conservative forecasts in an over-optimistic market
- With recent changes to accounting standards, the importance of focusing on cash generation has increased
- We purchase shares at a discount to what we see as their fair value
Managing the portfolio
Click here to read the latest fund manager update.
Why active management?
To achieve IHT relief for investors using BPR, all investments must be 'qualifying shares'. We ensure that individual holdings will be sold if they no longer qualify – for example, if they were to leave AIM or were taken over by a non-qualifying company.
Investments in smaller companies carry a higher risk than their larger peers. By constantly monitoring the operational performance of investee companies and wider market data, we seek to exit positions should we feel the risks of holding a stock for the full two year period outweighs the tax benefits. Any proceeds can be reinvested into replacement shares without the loss of the accrued holding period within 3 years.
We aim to keep portfolios fully invested where possible, although we keep small cash balances in order to cover ongoing fees.
Investing in ‘series’
Generally, investors’ subscriptions are collected and invested together within a new ‘series’. A series is launched after the last business day of every alternate month (February, April, June, August, October and December).
There is no minimum or maximum series size.
Timing of investments
We aim to invest client funds as soon as possible, but this process can take up to six months to complete, depending on the availability of suitable investment opportunities and market conditions.
To qualify for BPR, each equity investment must have accrued a two year holding period prior to death. If a client passes away before this time, holdings can be transferred to their spouse or civil partner without loss of the accrued holding periods.
Fees and service
The minimum investment into CITS is £50,000 and there is no maximum limit.
£250 + VAT (one off charge)
Annual management fee
1.25% + VAT of portfolio value
1% on the value of each transaction
This is subject to receipt of a signed adviser fee charging agreement. Close Brothers Asset Management will facilitate the collection of a client-approved adviser charge.
Statements and valuations
Portfolio valuations and statements are sent quarterly. It is also possible to ask for an interim valuation, should your clients need one. A consolidated tax pack will be sent out for taxable portfolios each tax year. These documents can also be viewed via our adviser online portal. Please contact us if you would like access to the portal.
As long as your clients leave at least £50,000 invested in CITS, they can make cash withdrawals at any time. These will usually be settled within 10 days of receiving the request. Where larger withdrawals (£50,000 or more) are being made, timescales may be longer due to the sometimes illiquid nature of the markets we invest in.
Please note: it is our understanding that any money withdrawn from CITS will fall back into the client's estate for IHT purposes. We therefore recommend that tax advice is sought before any action is taken.
The service is not a capital protection service and your clients’ capital is at risk. The service is dependent on relevant tax legislation remaining in force. Advisers and their clients should read the Close Brothers Asset Management Terms and Conditions and CITS application form for a fuller disclosure of the risks.