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Danby Bloch: Handle alternative investments with care


Most advisers avoid alternative investments due to problems that have been caused by them in the past. However, eschewing their use altogether could deprive clients of a valuable source of diversification alongside other benefits. Indeed, the case for at least considering alternatives is compelling, but it is essential to be discriminating.

Investments that qualify for inheritance tax business property relief can be especially useful. They allow the amount invested to become IHT free after just two years’ ownership and without leaving the client’s possession.

These investments are great for short(ish)-term IHT planning – for example, for someone who might be too ill or too old to expect to live for seven years.

There is a range of BPR investments, including Aim portfolios and generalist EISs, which have high investment risk but low likelihood that the tax position will change. These are probably more suitable for clients who might turn out to be relatively long-term holders with the ability to cope with fluctuating investment values.

Then there are the BPR solutions with very low volatility but negligible or nil return on investments. It is difficult to believe these are what the Government had in mind when it was designing this particular tax relief, and if the Treasury and HMRC knew how to stop them without messing up the more kosher business arrangements, they probably would.

There is a constant tussle between successive governments and the tax efficient investment industry. The government gives these tax incentives to investors to take risk and put their money into small businesses, while the industry mostly aims to minimise these risks as much as possible. With this in mind, there is always the danger the government will restrict BPR.

The best way to counter this admittedly fairly distant threat is to make sure each client understands the possibility of changes to the rules of the game.

It is also probably best to share the recommendations with the rest of the family at the time of the investment, so that everyone is clear about the objectives.

Another potential threat is that something goes wrong with the investment or the structure technically that disqualifies it from benefiting from the tax relief. This is a pretty rare phenomenon but it underlines the importance of using providers you trust to get it right.

VCT tax relief

Venture capital trusts can also look attractive, especially in the context of retirement planning. There is an upfront tax relief boost to the initial investment of 30 per cent, which helps compensate for the extra risks involved in investing in smaller companies. In the longer term the main attraction for many clients in retirement may lie in the freedom from tax on the dividends.

When planning a portfolio in retirement, stability of income flows is probably a higher priority than low volatility of capital values. So it is worth finding out about VCTs’ dividend policy and the likelihood of them being sustainable.

Past performance of certain VCTs has been reassuring. Tax Efficient Review’s Martin Churchill has  been running and monitoring a portfolio of successive VCT investments since 2004. From a net cost of £82,500 after tax relief the portfolio has turned a profit overall of over £101,000 that includes pretty stable tax free dividends of just over £74,000 in aggregate, with annual internal  rates of return ranging from 2.03 per cent to 18.3 per cent.

Of course, past performance is an unreliable guide to the future, as we all know. And it is not just that the investment environment over the past decade has been in a state of flux, encompassing the biggest market slump followed by a major revival. The rules restricting what VCT managers can invest in change pretty much every year as well.

This year, the rule changes have been especially restrictive and, according to Churchill, seem likely to cut back the flow of good generalist VCT investment opportunities, according to Churchill, particularly following the ban on management buy-out based investments that will take effect this month.

Do not get into this area without doing serious homework and preparation. Alternative investments have their attractions – some of them unique – but there are dangers for the unwary in the form of scams, mistakes, high costs and simple changes in taste.

Danby Bloch is chairman of Helm Godfrey



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