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Four reasons why advisers should think about inheritance tax for their clients
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Tony Sime
Partner and Sales Director
Downing launches new actively managed liquid alternatives fund aiming to deliver 7% to 10%+ per annum and positive returns in most markets. The new MGTS Downing Active Defined Return Assets Fund (‘Active Defined Returns’, the ‘Fund’), is the first fund from its new Liquid Alternatives team.
The Fund is aimed at institutional investors, Discretionary Fund Managers, IFAs and advised sophisticated individual investors, and will primarily consist of UK Government bonds and large-cap equity index options, which provide significant scalability and strong liquidity. It aims to deliver 7% to 10%+ per annum and positive returns in all markets except for a sustained equity market fall (generally more than 35%), over a period of at least six years.
The Fund is the first to be launched by the new Liquid Alternatives Team established by Downing. Collectively, the team has over 125 years of experience and sector knowledge, and includes Tony Stenning, who held senior roles at BlackRock and most recently was CEO of Atlantic House Group; Russell Catley, founder and also a former CEO of Atlantic House Group; Huw Price, a former Executive Director at Santander Asset Management, and Paul Adams, former Head of Cash Equities and Derivatives Sales, Royal Bank of Canada.
The Fund offers investors a compelling building block for multi-asset portfolios, aiming to add consistent and predictable returns, typically secured with a portfolio of UK Government bonds. The unique proposition includes a hybrid approach of using systematic derivative strategies and active management, combining liquid investments with predictable returns, and an equity like risk profile.
Investment strategy: Maximising the probability of delivering predictable defined returns across the economic cycle.
Systematic Liquid Derivatives: Systematic, derivative strategies optimise the equity risk-return profile. The Fund uses rules-based derivative strategies linked to the most liquid, large-cap global equity indices (i.e. FTSE100, S&P500) with the aim of harvesting well-proven consistent returns across a wide corridor of market conditions.
Strong security: The Fund will hold a high-quality portfolio of assets as secure collateral – typically UK Government bonds.
Active benefits: At times, rules-based, passive derivative strategies can underperform when markets move strongly – this is when specialist active management can add incremental gains by monitoring and monetising positions and applying active risk management.
Key benefits
Increased consistency and predictability of returns: Positive returns in all markets except for a sustained equity market fall of more than 35% over at least six years.
Diversification of risk: The Fund’s risk components are diversified across large, liquid equity indices, observation levels and counterparties. Secured with high-quality assets – typically UK Government bonds.
Active management: Our experienced team will actively manage the Fund and its investments to optimise risk and reward for investors.
Russell Catley, Head of Retail, Liquid Alternatives at Downing, said: “Put simply, we focus your investment risk on the probability of receiving the returns you need, not those you don’t. We target the highest probability of delivering 7% to 10%+ per annum with active management adding material incremental gains. We believe that we are building the next evolution of the proven success of Defined Returns funds
The Downing team isseeing strong demand from clients looking for alternatives to large-cap equity funds which are becoming concentrated in technology stocks, or alternatives to UK equity income funds and illiquid alternatives.”
Tony Stenning, Head of Liquid Alternatives at Downing, said: “The launch of our Active Defined Return Assets Fund is a significant milestone in the ambitious build-out of our new Liquid Alternatives strategies. It is a solution-focused fund that should deliver stable high single or low double-digit returns across a wide spectrum of equity market conditions, except for a persistent multi-year bear market. The Fund is designed to enhance balanced portfolios by providing consistent, predictable returns and is suitable for accumulation or drawdown.
“We aim to deliver a unique combination of proven systematic derivative strategies and specialist active management, and we are doing so at a very compelling fee level, below our closest competitors and in line with active ETFs.”
How the Fund is expected to perform in different markets
In bullish markets: UK Government bonds secure the capital, and the equity index options deliver a predictable 7-10%+ return per annum – giving up some less likely upside.
In neutral markets and normal market corrections: UK Government bonds secure the capital, and the index options deliver a predictable 7-10%+ return per annum.
In a sustained sell-off: if markets fall more than the cover to capital loss and do not recover for six years. Then capital is eroded 1:1 in line with the worst performing index.
The average Cover to Capital Loss is targeted at 35%: the average cover to capital loss represents the average level the Global indices within the Fund could fall before capital is at risk.
Fund key risks
Performance: Capital is at risk. Investors may not get back the full amount invested.
Liquidity: Access to capital is always subject to liquidity.
Counterparty risk: Other parties could default on the contractual obligations.
Fund Structure
UK regulated OEIC fund structure, fully UCITS compliant
Daily dealing, at published NAV
Minimum investment: £100,000
SRRI: 6 out of 7
Depositary: Bank of New York
Authorised corporate Director (‘ACD’): Margetts Fund Management Ltd.
I share-class: SEDOL: BM8J604 / ISIN: GB00BM8J6044
F share-class: SEDOL: BM8J615 / ISIN: GB00BM8J6150
Risk warning: Opinions expressed represent the views of the fund manager at the time of publication, are subject to change, and should not be interpreted as investment advice. Please refer to the latest full Prospectus and KIID before investing; your attention is drawn to the risk, fees and taxation factors contained therein. Please note that past performance is not a reliable indicator of future results. Capital is at risk. Investments and the income derived from them can fall as well as rise and investors may not get back the full amount invested. Investments in this fund should be held for the long term.
Important notice: This document is intended for professional investors and has been approved as a financial promotion in line with Section 21 of the FSMA by Downing LLP (“Downing”). This document is for information only and does not form part of a direct offer or invitation to purchase, subscribe for or dispose of securities and no reliance should be placed on it. Downing does not offer investment or tax advice or make recommendations regarding investments. Downing is a trading name of Downing LLP. Downing LLP is authorised and regulated by the Financial Conduct Authority (Firm Reference No. 545025). Registered in England and Wales (No. OC341575). Registered Office: 10 Lower Thames Street, London EC3R 6AF.
Inheritance Tax (IHT)
Tony Sime, Sales Director, Downing LLP- Any personal opinions expressed are subject to change and should not be interpreted as investment advice or a recommendation.
1. A growing number of people are falling subject to IHT unexpectedly
There are several ostensible reasons for these sharp increases but the one that may surprise you the most in today’s modern world, is that some parents still aren’t talking to their adult offspring about their family wealth.
I regularly come across scenarios where sons and daughters aren’t discovering the extent of their parent’s wealth until fairly late in their lives. It seems that the very British – and well intentioned - tradition of keeping your financial affairs extremely private still stands. But this can lead to all kinds of issues for sons/daughters who may only discover this when it’s too late and they are faced with a large IHT bill upon their parents’ death. Even if they find out before then, either or both the parents and their offspring may still have a big job on their hands to help mitigate IHT, particularly if the parent in question is in poor mental or physical health.
2. Keep an eye on the value of your property & other assets
In April 2017, a new residence nil rate band (RNRB) was introduced in addition to an individual’s own nil rate band of £325,000, which initially led many to think that less people would be liable to IHT.
How the RNRB works
Having been set initially at £100,000 per person in 2017, the RNRB has increased by £25,000 each year and will eventually be capped at £175,000 in 2020/21.Thereafter, it will increase in line with the Consumer Price Index (CPI). This means that by 2020/21, families can protect up to £1 million of their wealth from IHT, provided certain conditions are satisfied (see reference 3 for source).
An important note that the RNRB only applies when someone is passing on their main residence to direct descendants such as children or grandchildren.
So far, so good? Not necessarily, because the price of assets, whether it’s property or investment portfolios, have largely continued to grow in value too, which has pushed many unsuspecting people over this £1 million threshold. People living in areas that have experienced significant house price rises in recent years should be careful.
However, if you are fortunate enough to have an estate worth more than £2 million the RNRB will be subject to a taper; for every £2 above £2 million, the RNRB will be reduced by £1. This means that joint estates worth £2.7 million and over will not benefit from the RNRB
3. Different rules may apply
Different sets of rules for IHT may apply to you and your loved ones. The standard 40% rate on anything above the £325,000 threshold will automatically apply for people who are single or unmarried. Making a will is particularly important for anyone in this position, as a way of ensuring that their estate is passed on in line with their wishes and help guarantee that their beneficiaries don’t pay more IHT than they need to.
By contrast, if one partner in a married couple or civil partnership passes away, their entire estate can be transferred to their spouse without being liable for IHT. And the unused balanced on their nil-rate band is also passed on to their spouse.
4. Don’t put off planning
Talking about plans for passing your money on, whether it’s with your partner, family or financial adviser, doesn’t always feel like the easiest conversation to have. And some of the big questions – what if I need my money back? What if I gift my money and my daughter and son-in-law divorce? ‘What if I change my mind?’ – can make some people particularly hesitant to make decisions about if and how to pass on their estate. But delaying plans could lose you vital time, particularly as some forms of IHT relief can take years to kick in.
Gifting some of your assets to a loved one or putting them into a trust - two of the most traditional ways to mitigate IHT – can take up to seven years to qualify for the tax relief. Business Relief investments, often available through estate planning services, become exempt from IHT after two years.
It’s crucial to consider all of these options against your personal circumstances before deciding which route to take and it is also possible to blend these different strategies, to help meet the needs of you and your loved ones while also spreading risk across different investments.
This article is for information purposes, should not be regarded as investment or taxation advice and no reliance should be placed upon it. Capital is at risk and you may not get back the full amount invested. Tax treatment depends on the individual circumstances of each investor and may be subject to change. The availability of tax reliefs depends on investee companies maintaining their qualifying status. Investments in smaller companies will normally involve greater risk or volatility than investments in larger, more established companies. Downing LLP is authorised and regulated by the Financial Conduct Authority (Firm Reference Number 545025). Registered in England No. OC341575. Registered Office: St Magnus House, 3 Lower Thames Street, London EC3R 6HD.
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