Presentation on AIM for IHT planning - Mello 2014

Investing in AIM for IHT mitigation
Christopher Boxall
www.fundamentalasset.com
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About Fundamental
 Specialist Investment Manager.
 Established 2004 by Christopher Boxall and Stephen Drabwell
 Highly experienced investors in AIM for IHT planning purposes
 Authorised and Regulated by the Financial Conduct Authority in the
United Kingdom.
 Conduct own research and support associated business
Investor’s Champion (www.investorschampion.com)
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Investing in AIM for IHT planning – the rules
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Business Property Relief (BPR) available for assets qualifying as ‘relevant business property’
which have been held for a minimum period of 2 years.
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Inheritance Tax Act 1984: 100% relief from Inheritance Tax (IHT) for ordinary shares in
companies not listed on a recognised stock exchange (unquoted) - qualifies as ‘relevant
business property’.
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Includes shares traded on Alternative Investment Market (AIM) or ISDX.
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‘Qualifying’ AIM companies considered ‘business assets’.
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Shares can be traded i.e. you don’t have to hold the same shares for 2 years.
 (Replacement property rules)
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For IHT purposes shares in overseas companies also qualify.
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From 5th August 2013 ISAs may also hold AIM shares (we see increasing activity)
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What qualifies *
- 740 qualify
- 25 Dual listed qualifying
- 79 part qualify or unclear
* Investors Champion AIMsearch Sept 2014 data
Investing in AIM for IHT planning – the rules
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What doesn’t qualify?
- Business or company is engaged wholly or mainly in dealing in securities, stocks or shares,
land or buildings, or in making or holding investments
- Business is not carried on for gain
- Business is subject to a contract for sale, unless that sale is to a company which will carry
on the business, and the sale is made wholly or mainly in consideration of shares in the
company buying the business.
- Shares in the company are subject to a contract for sale or the company is being wound
up, unless the sale or winding up is part of a reconstruction or amalgamation to enable the
business of the company to be carried on
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Fundamental philosophy:
- Avoid the controversial.
- Avoid partial qualification
- If in doubt….get out!
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What happens if Co moves to Main Market or obtains another listing on a recognised
exchange?
– sell and reinvest before it moves or the listing is secured!
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HMRC officials confirm that their staff are trained to carefully monitor the position.
What is AIM?
 AIM is the junior market of the London Stock Exchange
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Generally a market for smaller growing companies
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No min size, no financial history, no public holding restrictions - Light touch regulation
 Established 1995 (10 companies)
 Oct 2014, 1,099 companies (as many as 1,694 in 2007) – but improving quality
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Main market approx. 940 companies, market value c£2.0 million million (US trillion – a
big number!)
 Total market value of AIM c£75bn (Oct 2014)
 Majority of AIM companies by value £10m - £250m (670 companies)
Largest Songbird Estates approx £2bn – doesn’t qualify for IHT!
 Average daily value of shares traded 2013 c£117m (High £296m in 2007)
 Increasing number of older, established companies.
 AIM is a market for the smaller investor
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Some of our current AIM for IHT Companies
Company
Description
Abcam PLC
Production and distribution of research-grade antibodies
Advanced Medical Solutions PLC
High performance polymers for woundcare
Alternative Networks PLC
Independent telecommunications provider
CVS Group PLC
Animal veterinary practices, pet crematoria and an online pharmacy.
Flowtech FluidpowerPLC
Distributor of technical fluid power products.
James Halstead PLC
Manufacture of commercial flooring
James Latham Plc
Import and distribution of wood based materials (Hemel)
KBC Advanced Technologies PLC
Consultancy and software solutions to energy industries.
Nichols PLC
Soft drinks supply (Vimto)
Pressure Technologies PLC
Manufacturer of engineering solutions for high pressure systems.
Restore PLC
Records management, doc scanning, and secure shredding.
RWS Holdings PLC
Patent translation and searches.
Sanderson Group PLC
Software and IT to multi-channel retail and manufacturing sectors.
Solid State PLC
Manufacturing and distribution of electronic equipment
Tracsis PLC
Resource management technologies in the transportation sector
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What we look for in an AIM companies
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Principally looking for:
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Qualify for IHT purposes (our universe approx 500+ companies)
Min market cap c£10m (current average £118m)
Viable businesses with a trading history (outside AIM if necessary).
‘Real’ earnings and strong cash generation.
Strong balance sheet (Tangible asset backing, Low debt)
Dividend yield and cover.
Access to management.
Significant Director equity participation (and Directors acquiring) – options don’t count!
Suitable levels of Directors remuneration.
Senior execs with relevant sector experience
Family ownership
Institutional ownership
Margin of safety
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What we avoid!
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Avoid
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Companies that don’t quality or partially qualify
Speculative ‘ventures’.
Businesses with untested business models.
Poor share liquidity.
Poor cash flow
High levels of ‘stagnant’ cash
Excessive Directors remuneration – especially in businesses that are burning cash
Poor access to management.
Reluctant management
Director selling
Media hungry CEOs, especially those obsessed with BBs
Don’t be obsessed with stock screens
How we structure AIM portfolios
 Balanced portfolio (not fund) of AIM stocks across sectors and industries.
 Well diversified….some might consider over diversified
 The objective is to offer Capital Growth, Dividend Yield and… Save tax.
 Limited trading – long term and buy and hold, subject to…
 Supports our philosophy of patient investing – avoid short term ‘noise’
 Obliged to be fully invested at all times
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The Research process – does it qualify?
 Investors Champion - http://aimsearch.investorschampion.com/
 Admission Document (it’s rarely read) – references to BPR, nature of activities
 Balance Sheet – property, investments, cash
 Income statement – investment income
 Cash flow – investment income, capex
 Notes to the accounts – nature of investment
 RNS releases
 Dual listing - some (approx. 25) dual listings still qualify (HMRC guidance)
 Ask the Company
Camellia PLC (CAM) – does it qualify?
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Obvious attractions
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Well established (over 150 yrs ago!)
Main market 1960s, recent move to AIM
Diverse activities
Agriculture – Tea, Macadamia nuts, pitachios, pineaapples, citrus, livestock, forestry, rubber,
wine
Food storage and distribution – Netherlands and UK
Private Banking – Duncan Lawrie
Engineering
Second biggest private tea producer in the world
Employs over 73,000
Year end Dec 2013: Revenue £251m, PBT £60m – although interims not as compelling!
Cancelled listing on Luxembourg SE
6th August 2014 “…in order for the Company's Ordinary Shares to be eligible for the possible
tax benefits arising from the Company's Ordinary Shares being traded on AIM…, the
Company cannot retain its secondary listing of the Ordinary Shares on the Luxembourg Stock
Exchange.”
11th July 2014 - Proposed Delisting from the Official List and Admission to trading on AIM.
“….the Company should currently constitute 'relevant business property' for the purposes of
UK inheritance tax business property relief. Accordingly, following the Move to AIM,
individuals who hold Ordinary Shares and who meet the two year ownership condition may
be eligible for UK inheritance tax business property relief, although based on the current
nature of the Group and its assets, it is not considered that full relief at 100 per cent. would
be available.”
Camellia PLC (CAM) – does it qualify?
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What percentage qualifies?
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Very difficult to determine!
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Balance Sheet at 30th June 2013
Net assets £354m (Note: mkt cap £245m!) includes:
Investments in associates £7.3m
Financial assets £57m
Other investments £8.7m
Cash £263m includes £207,248,000 held by banking subsidiaries and which are an integral
part of the banking operations of the group.
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Nature of activities of Duncan Lawrie Private bank – securities dealing?
Our view – avoid!
Sigma Capital Group (SGM) – does it qualify?
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Attractions
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Residential urban and regeneration specialist – property development not investment.
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Exit from historic venture capital activities
24th Dec 2013 “Disposal of our remaining shareholding in Frontier IP and the transfer of
three of our venture capital funds help towards completion of the process of refocusing the
Group entirely on our property activities."
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Exposure to private rented sector.
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Regeneration partnerships – partnering with local authority landowners to develop sites.
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Property management
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Cash on balance sheet at 30th June 2014 £9.1m - net assets £10.1m.
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Share price 11th May 2012 7p - mkt cap approx. £4m
Share price 3rd Nov 2014 62p - mkt cap £37m
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Obvious attractions, but does it qualify?
Sigma Capital Group (SGM) – does it qualify?
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It’s all about the cash!
 From Investors Champion AIMsearch
“The substantial cash balances, which are not earmarked against specific projects and
significant relative to the Group’s net asset value, and the remaining holding in a Partnership
Fund are likely to be considered excepted assets. HMRC can determine that large cash
deposits can be deemed to be excepted assets even if they are used in the business at some
future date. “
 Under Barclays Bank Trust Co Ltd v CIR SpC 158. The Special Commissioner posed the question
as follows, at para 10 of his decision –
“Was the £300,000 cash held by the company required on 23 November 1990 for future use
for the purposes of the business? This is a question of fact and on the evidence before me I
cannot find that it was so required. I do not accept that “future” means at any time in the
future nor that “was required” includes the possibility that the money might be required
should an opportunity arise to make use of the money in two, three or seven years’ time for
the purposes of the business. In my opinion and I so hold that “required” implies some
imperative that the money will fall to be used upon a given project or for some palpable
business purpose.”
 Our view – avoid!
Total Produce PLC (TOT) – does it qualify?
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Obvious attractions
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Substantial business.
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Easy to understand - one of the UK’s largest fresh produce providers (demerged from Fyffes).
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Admitted to AIM Jan 2007
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Employs over 4,000
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Year end Dec 2013: Revenue €3.2bn, PBT €48m
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Few clues in news releases but, company web site reveals quote from Irish Stock Exchange
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Web site also states TOT “As an AIM/ESM listed company,…”
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Dual listing!
Total Produce PLC (TOT) – does it qualify?
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Status of ESM is key!
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ESM is the Enterprise Securities Market of Irish Stock Exchange not Main Securities Market
(MSM),
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HMRC
Table 2: Recognised stock exchanges within the law of named jurisdictions for the purposes
of section 1005 Income Tax Act 2007 (PDF 32K) http://www.hmrc.gov.uk/fid/table2-rse.pdf
“Markets on which securities would not meet the HMRC definition of 'listed' for the
purposes of HMRC legislation” includes ESM
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Qualifying Dual listed
Robinson PLC (RBN) – does it qualify?
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Obvious attractions
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Well established (dates back to 1839)
Admitted to AIM in 2004
Packaging business expanding
Decent size:
Year end Dec 2013: Revenue £23m, PBT £3.7m
Strong balance sheet
As at 30th June 2014 net assets £24.8m, including Property Plant £16m and pension asset
£4m
Significant family ownership
But, notes to the accounts reveal:
Property rental income £464k
Profit on disposal of land and buildings £1m
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Statement in note 10. “The Directors consider the fair value of the surplus properties
equates to a market value of £2.7m”
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Facts suggest RBN may only part qualify, however…..
Robinson PLC (RBN) – does it qualify?
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Robinson web site offers help!
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www.robinsonpackaging.com/investors/tax-aim/
Tax & AIM
“Certain relief from Inheritance tax is available to AIM listed business’s owning business
property.
Robinson plc currently qualifies for this relief since the properties held are residue from
previous trading activities and there is an active plan to dispose of them.”
Assumed Risks of investing in AIM!
March 2007, U.S. securities regulator Roel Campos suggested that AIM was like a "casino". Campos:
"I'm concerned that 30% of issuers that list on AIM are gone in a year. That feels like a casino to
me"
 Fewer than 2% of Companies on AIM fail each year and the vast majority of
these are very small (2013, x99 joined, raising £1.18bn).
Many are taken over go on to greater things
 Smaller companies and shares less liquid (wide bid/offer spreads)
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Stick to larger AIM companies
Diversify
More relevant to large institutions
 Lack of track record
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Some very old companies on AIM
 Lack of research and limited broker coverage
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Plenty of research and comment out there and DYOR!
 Number of scandals – so what, huge winners!
 Change in tax legislation – only positive!
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Government has recently expanded AIM acceptance to ISAs and from 6th April 2014 zero
stamp duty on AIM stocks
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Risk of holding Blue chips, Bonds, Unit
Trusts, ISAs, etc
 Risk of capital loss
 40% potential IHT bill
 Main stock market has changed dramatically (ETFs, computer driven
trading, derivatives etc)
 Some blue chips are now trading like small caps of old
 Bond yields low
 Fund problems (Lack of transparency, lock-ups, costs)
 Current market – stock specific matters irrelevant (Small/Micro caps
continue to trade on fundamentals)
 Reminder: PEPs and ISAs are subject to IHT and ISAs can now hold AIM
shares
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Compelling benefits of AIM for IHT planning
 Non-contentious, simple tax planning solution.
 Cost effective compared to trusts.
 Investor retains control over assets.
 AIM for IHT planning has proved an excellent investment strategy for
patient long term investors.
 ISA investment from August 2013.
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Disclaimer
The investments referred to in this presentation may not be suitable for all investors. Nothing in this presentation should be construed as, investment or
tax advice. Potential investors are recommended to seek specialist independent tax and financial advice before investing in any of our products. It is not
intended that anything stated in this presentation should be construed as an offer, or invitation to treat, or inducement for you to engage in any
investment activity. The information in this presentation relating to portfolios managed by Fundamental is directed at United Kingdom residents only.
Please remember that past performance is no guide to future performance and may not be repeated. The value of investments and the income derived
from them may go down as well as up and you may not get back the amount originally invested. Tax rules and regulations are subject to change.
An investment into any of our products may only be made on the basis of the information set out in the respective prospectus or account opening
documentation. Any information is not an offer or invitation to buy or sell shares. Opinions expressed in this presentation represent the views of
Fundamental at the time of publication. These are subject to change, and should not be interpreted as investment advice.
Investments in unquoted and AIM-quoted companies tend to carry a higher risk than investments in most securities listed on the main market of the
London Stock Exchange and may be more difficult to sell. The inheritance tax relief applies to holdings in qualifying unquoted and AIM-quoted companies
if they have been held for more than two years at the time of death and is based on current tax rules and regulations. Money that is withdrawn from
qualifying holdings, or that has not been invested in qualifying unquoted or AIM-quoted companies for at least two years, will not generally be exempt
from UK inheritance tax. We will invest in companies that we reasonably believe to be qualifying investments based on our understanding of HMRC's
current interpretation of the rules and regulations, but we cannot guarantee this, nor can we guarantee that any changes in legislation will not have a
retrospective effect. Please remember that tax rules and regulations are subject to change and depend on personal circumstances.
Fundamental Asset Management Ltd is authorized and regulated by the Financial Conduct Authority
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