Type: Inheritance tax mitigation solution
Aim: Reducing IHT liabilities and providing income by outsourcing essential IT infrastructure and systems to businesses on fixed-price contracts
Minimum investment: Lump sum £100,000
Investment split: 100% in IT outsourcing contracts
Charges: Initial up to 5%, annual 1% paid only after investors receive a return of 0.25 per cent above the Bank of England base rate
Commission: Initial 2.5% or initial 1.5% plus 0.5% renewal
Tel: 020 3006 7530
RAM Capital and boutique investment manager BMI Finance are promoting Sunstone Outsourcing, an inheritance tax mitigation solution This allows investors to shelter part payments from IHT by buying IT infrastructure and systems that are essential for the running of businesses and seeing up fixed price outsourcing contracts so that clients firms can use the systems.
Sunstone qualifies for business process relief, enabling it can provide 100 per cent IHT relief after two years if the investment is held at the time of death. It will provide investors with a minimum income of 0.25 per cent above the Bank of England base rate and will not take its annual 1 per cent fee if this is not achieved.
Assessing the product’s usefulness and suitability to the market, Michael Philips proprietor Michael Both says: “For high-net-worth clients who have substantial liquid assets and who are looking for a way of quickly mitigating significant inheritance tax liabilities this is worth serious consideration. “
He points out that the gist of the scheme is that the investor becomes a limited liability partner in a business which qualifies for entrepreneurs’ relief.
“To quote from the information memorandum, ‘Under entrepreneurs’ relief, an individual who has owned an interest in a qualifying trading business for at least one year will pay a reduced 10 per cent rate gains on the disposal of an interest in such a business. In the context of Sunstone Outsourcing this relief should be available if an investor who meets the ownership condition disposes of his LLP interest, but not on any gains which arise on the disposal by Sunstone Outsourcing of individual assets.’”
Both notes that for IHT purposes the, investors in Sunstone Outsourcing will be treated as if they are carrying on the IT outsourcing business of Sunstone Outsourcing in partnership. The literature points out that where a transfer of value made by an individual, for example on death, comprises of certain types of business assets, relief from IHT is given by the Business Property Relief provisions.
Both notes that this may be available at 100 per cent where the property comprises an interest in a business and that business consists wholly or mainly of qualifying business activities. For the relief to apply the taxpayer must own the relevant business property, which is the partnership not an interest in the underlying assets of the partnership, for a minimum period of two years prior to the transfer of value. For these purposes the property concerned is the partnership interest and not an interest in the underlying assets of the partnership. The two-year period will start at the point that Members pay their initial subscription.
Both says: “The attraction of this scheme does not lie in the 10 per cent rate on capital gains, although this is welcome. Investors in this company are unlikely to make any capital gains and the distributed income is targeted to be a little over bank base. In fact, this investment aims to be really boring, which paradoxically is what makes it exciting. The appeal is that after two years the investor still owns their shares yet they are no longer counted for inheritance tax purposes.”
Both says that what happens after five years is not spelled out in the memorandum. “It is envisaged that most investors would want to dispose of their shares sometime between two and five years, at which point Sunstone will cheerfully relieve them of a further 4 per cent for the share transfer. Weighed against the 40 per cent inheritance tax the deeply indebted HMRC is currently demanding without so much as a sheepish grin, it is likely many shareholders will be whistling as they fill out the stock transfer forms in favour of their descendants.”
Discussing the potential drawbacks of Sunstone, Both says: “As disclosed in the memorandum, there are very real potential conflicts of interest for the senior management. Most, if not all, of whom will have roles in related businesses. Ultimately, Sunstone partners can only hope they will be treated fairly in terms of profit share and asset protection.”
Both adds that he is less than comfortable with memorandum item 9.14 which states that the management team is entitled to make reserves out of the profits of Sunstone Outsourcing LLP as it thinks fit and is entitled to divide the reserves into special funds. The management team may also carry forward any profits which it thinks prudent not to distribute, and may also specify any date as a record date on which unit holders are entitled to receive any distribution of profits. “It is far from transparent how the managers will remunerated or incentivised,” says Both.
The main alternatives to this plan would include Albion Ventures trading companies or investments in qualifying AIM portfolios such as Smith & Williamson, according to Both.
Both says: “The theory of this investment all depends on Sunstone being able to run the business in line with the stated objectives. Investors have often been burned by promoters who knew all the theory but had none of the necessary practical skills to actually implement it. In Sunstone’s case, the management team of BMS is largely drawn from netdecisions whose business was for most practical purposes the same as the proposed venture and one could reasonably infer they know what they are doing.”
Both points out that the annual return of Base Rate + 0.25 per cent on the net asset value of each unit is not guaranteed but could be very appealing if the alternative is a portfolio of highly volatile Aim stocks. “But investors must not forget that there are real risks involved. There will be little liquidity and it will be very difficult to value the shares at redemption. With a minimum investment of £100,000 this is only for the seriously wealthy.”
Suitability to market: Good
Investment strategy: Good
Adviser remuneration: Average