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Watershed event for AIM

The proposed acquisition of main market listed SDL (LON:SDL) by AIM quoted RWS Holdings (LON:RWS) is, in our opinion, a watershed moment for AIM, as an AIM company acquires a sizeable main market listed peer, but the combined group reamins on AIM.

RWS is one of the world’s leading language, intellectual property support services and localization providers. While those don’t sound like the most thrilling of activities RWS has delivered stunning results for shareholders over the years.

Chris Boxall discusses the deal in this video here.

Fundamental have been investors in RWS, whose headquarters is close to our own office, for about 14 years. Here is a brief history of its progress on AIM.

RWS arrived on AIM in October 2003 via a reverse into the previously named shell company Health Media Group.

The equivalent share price at the time was 22p and market capitalisation £45m. Fast forward nearly 17 years and the shares have risen nearly 2700% to 613p (they were as high as 767p this month), with the market capitalisation £1.8bn.

Through a mixture of organic, and more recently more acquisition led growth, RWS has developed into one of AIM’s largest companies.
RWS’s acquisition strategy really accelerated in 2013 with the acquisition of inovia Holdings, a leading provider of web-based international patent filing solutions.

It followed this in November 2015 with the sizeable acquisition of Corporate Translations for US$70m. CT was the world’s leading life sciences translation and linguistic validation providers.

February 2017 saw the acquisition of LUZ, a market leading Life Sciences language services provider based in San Francisco, for a cash consideration of US$82.5m. To support this meaningful acquisition, it raised gross proceeds of £40.0m at 330p per share.

In Nov 2017 it acquired Moravia, a leading provider of technology-enabled localisation services, for $320m. Localisation is the adaptation of content, software, websites, applications, marketing materials and audio/video for hundreds of languages and geographies. It requires the translation and customisation of clients’ content and platforms for cultural conventions, compliance with local regulations and consistency of brand style and tone.

For the half year ending 31 March 2020, Moravia represented 47% of RWS’ group revenue of £170m and 34% of the group’s operating profit.
Smaller acquisitions followed in 2019 and June 2020, culminating in this week’s deal to acquir main market peer SDL Group in a £700m all-share deal.

The combination of SDL and RWS will create the world’s leading language services and technology group with capabilities across a range of language services and IP services, combining the complementary strengths of RWS’ specialist technical translation and localisation capabilities with SDL’s software, machine translation and AI capabilities.

It will support an expanded blue chip customer base with limited overlap across its core markets, including 90 of the world’s top 100 brands by value, all the top 10 pharmaceutical companies globally, many of the major West Coast technology businesses, and approximately half of the top 20 patent filers worldwide.

The RWS name will be retained for the combined group which will continue to be headquartered in Chalfont St Peter and remain listed on AIM, which is good news for those holding shares in RWS for the Inheritance Tax planning attractions, including many of our clients.

The combination should put SDL’s technology to better use thereby enhancing margins, which in the case of SDL, have been somewhat ordinary – while the two businesses had similar revenues in 2019, RWS’s operating margins were more than double those of SDL. Pro forma FY2019 revenues are £732m and pro forma adjusted operating profit £116m, imply a combined operating margin of 15.8%.

What has been constant in RWS’ journey has been the presence of Chairman Andrew Brode, who retains a near 33% stake in the current business and to our knowledge has never sold a share. We are reassured that, with so much of his personal wealth at stake, Mr Brode would have thought long and hard about this deal. The Inheritance Tax planning attractions are no doubt an incentive for him to keep the group on AIM!

You can find out more about Fundamental Asset Management’s high performing AIM portfolio service, which has been delivering exceptional investment returns for more than 16 years, from the link here.


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As AIM celebrates its 25th birthday, are the tax reliefs at risk?

A recent article in the popular press has alluded to the potential withdrawal of Inheritance Tax/Business Relief on AIM shares.

As a well-established investor in AIM for Inheritance Tax (‘IHT’) planning purposes, we have become used to regular press mutterings over the 16 years we have been managing our AIM for IHT portfolios. The introduction of an Autumn statement gave the press another opportunity to cover this topic, whether they had anything worthwhile to say or not.

It is also somewhat ironic that the latest press report comes at a time when AIM is probably enjoying the most positive period in its 25 year history, with numerous small AIM pharma and biotech groups at the forefront of developing tests and vaccines in the battle against Covid-19. This has not been possible without the support of their shareholders, many of whom have been encouraged to invest with the added attraction of IHT relief.

While there has always been the risk that tax relief might be removed or restricted in some form, if anything the tax reliefs for investing in AIM have been enhanced over the years. The availability of AIM shares in ISAs from 2013 resulted in a wave of new money finding its way to London’s growth market and the majority of new investment in our AIM for IHT portfolios (and no doubt those of other providers) is now via ISA transfers. The withdrawal of stamp duty on AIM shares in 2014 provided further encouragement.

Business Relief rules in brief
Investments that qualify for Business Relief (formerly Business Property Relief) can be passed on free from Inheritance Tax upon the death of the investor, provided the shares have been owned for at least two years at that time.

The shares of qualifying AIM companies benefit from the Business Relief rules, which were introduced in the 1976 Finance Act by Labour Chancellor Denis Healey. The primary objective at that time was to ensure that, after the death of the owner, a family-owned business could survive as a trading entity, without having to be sold or split up to pay an IHT liability. For the purposes of the Business Relief rules, AIM does not meet the HMRC definition of ‘listed’, accordingly shares in qualifying companies on AIM carry the same Business Relief benefits as private trading companies.

Not all AIM companies qualify for Business Relief and, for a modest outlay, our associated Investor’s Champion’s AIMsearch tool can tell you which do, which don’t, and which are doubtful.

The evolution and maturity of AIM now means that many substantial companies and their shareholders benefit from Business Relief, causing some to question the appropriateness of this attractive tax incentive – AIM quoted boohoo Group, the UK’s fourth largest listed retailer with a market capitalisation of £5.3bn, which would gain it entry to the FTSE100 Index, qualifies for Business Relief purposes.

Intelligent Partnership, the UK’s leading provider of education and insights on alternative investments, has commented how, prior to the last Budget there was speculation that Chancellor Rishi Sunak might alter IHT – from something as radical as replacing it with a lifetime gifting allowance through to reducing or removing some of the Inheritance Tax reliefs, including Business Relief.

The removal of Business Relief would clearly have negative effect on the AIM market. According to Investor’s Champion’s AIMsearch, 65% of AIM companies qualify for the relief and a further 10% offer some qualification, subject to exclusion for excepted assets on their balance sheets. We consider that any impact from the withdrawals of relief may be less significant for larger more liquid AIM companies (Mkt cap £250m+), the share registers of which are now dominated by mainstream institutional investors, rather than AIM for IHT managers. For example, the share register of Fevertree Drinks, one of AIM’s largest and most successful companies with a market capitalisation of £2.4bn and a Fundamental AIM portfolio holding, is dominated by mainstream institutional funds, which hold 39% of the equity. The founders still retain a combined 11.76% but institutions have proved to be keen buyers of their shares in the past. The same applies to many other large, rapidly growing AIM companies, with institutions eager buyers of large parcels of shares if the opportunity arises. This has been notable over the pandemic where numerous AIM fund raisings have been supported by large mainstream institutional investors, as opposed to IHT money.

Furthermore, the premium rating of many AIM companies is less about IHT investor buying and more to do with the attractive growth prospects of many substantial AIM companies compared to the low-growth opportunities available on the main UK stock market.

Sunak ultimately left IHT and Business Relief alone with some speculating that planned tax rises and relief cuts have now been pushed back until after the coronavirus threat has subsided. However, the government re-iterated its support of mechanisms through which growth can be generated, stating: “The government places a high priority on expanding the supply of finance through the cycle to support long-term investment to increase the productive capacity of the economy, across all regions and nations of the UK. This includes, but is not limited to, areas such as infrastructure, SME finance, venture and growth capital”

The UK government will have a need for new sources of revenue in view of the huge cost of supporting the pandemic and, a so-called tax expert quoted in the recent article, commented how the removal of Business Relief could be much more attractive than raising VAT or income tax. However, this seems questionable if one considers the irrelevance of IHT relative to the total UK tax collection, the current corporate funding demands and need to stimulate growth.

The HMRC Annual and Report and Accounts 2018/19 (a must read!) reveals that IHT receipts, which are lumped together with Other taxes, were a meagre £5.3bn, or 0.854% of total tax revenues of £628bn in 2018/19. Wealthy individuals paid £54bn of tax, small businesses £115bn and large businesses £135bn. VAT, which is included in the business numbers, contributed £135.6bn to the overall tax. Inheritance Tax doesn’t even get a specific mention in the HMRC report.

HMRC Statistics indicate the value of Business Relief claimed on unquoted shares was £828m in 2016/17 across 1,480 estates, an average of £559k per estate. Other Business Reliefs were £417m on 848 estates. This implies total tax saved of £498m through the combined Business Reliefs (40% x £828m+£417m) or 0.08% of total tax receipts, if applied to the 2018/19 numbers.

These numbers highlight the irrelevance of IHT relative to the bigger tax take, suggesting the government will need to address the main sources of tax to boost its coffers, rather than tinker with IHT.

Furthermore, it would surely make better economic sense to enhance, rather than diminish, tax incentives for individuals in smaller companies. This would help stimulate growth and ultimately do more to boost overall tax collections by boosting the major tax collection points of PAYE, VAT and corporation taxes.

To avoid the potential pitfalls of a change in the Business Relief rules, the legal profession would like investors to embrace the apparent benefits of using a trust. When the two-year minimum holding period for AIM shares had been reached, solicitors suggest the shares could be put in trust to cement the tax exemption. This could conceivably protect investors from any retrospective change to the rules, although the estate will then be saddled with a costly and unwieldy trust structure which comes with its own set of tax rules and places the investor’s assets in the control of others.

We have experienced on numerous occasions at first hand the added complexity and cost, including outrageous legal fees, imposed on relatively small estates with trust structures in place and would urge investors to think carefully before going down this route.

Since launch on 19 June 1995, AIM has supported nearly four-thousand growth companies in raising over £117bn, 61% of which has been through follow-on fundraisings. The equity fund raisings over the pandemic have seen investors plough £billions into UK companies to help keep them going, removing a further burden from the government and 158 AIM companies have raised £1.9 billion of follow-on capital in the first five months of 2020. Research from Grant Thornton shows that AIM companies directly contributed £33.5bn to UK GDP and supported more than 430,000 jobs in 2019.

The London Stock Exchange’s collaboration with Primary Bid has also broadened retail investors’ access to follow-on equity raisings during this challenging period. Many of these same fund raises have also been supported by founders whose continuing equity interest in their companies is underpinned by Business Relief attractions.

It would be strange timing for the government to remove incentives for investment in companies, large and small, at the time they most need it. In a recessionary climate the greater focus surely needs to be on supporting growth, which will ultimately lead to enhancing the bigger tax collections.

For a limited period, we think the government should actually consider enhancing the tax incentives for investing in the newly issued shares of UK listed companies, whatever their size, whether on the main market or AIM. Now that’s a radical thought!

You can find out more about Fundamental’s high performing AIM portfolio service, including the latest fact sheet for May, from the link here.

Fundamental Asset Management has delivered exceptional investment returns for more than 16 years.

 


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Inheritance Tax bill cut by 12%, or £710m, through investing in unlisted companies including AIM – record high

A new report from national accountancy group UHY Hacker Young highlights the tax saving benefits of investing in AIM quoted companies – there are considerable investment benefits as well!

According to UHY Hacker Young, HMRC forecasts show that the value of “Business Property Relief” is expected to rise 8% in 2017/18, from £655m in 2016/17.

Taxpayers are expected to reduce their Inheritance Tax (IHT) bills by 12% over the next year, or a record £710m in 2017/18, through investments made in unlisted companies and other business assets, says UHY Hacker Young.

Investments in qualifying AIM listed companies, Enterprise Investment Schemes (EIS) and other private companies have become increasingly popular over recent years as these assets are often exempt from IHT.

Investors have also benefited from exceptional investment gains as AIM has materially outperformed the main stock market over the past few years. This is reflected in the outstanding performance of AIM portfolios managed by Fundamental Asset Management and other providers.

– Scope to use BPR further

Latest figures show that taxpayers paid £5.3bn in inheritance tax in the last year to February 28 2018, up from £4.7bn in 2016/17*, suggesting that there is scope to use BPR to further lessen tax bills.

Mark Giddens, Partner at UHY Hacker Young, says: “The Government has reduced the scope of legitimate tax planning opportunities over the years especially for higher earners – so the few that are left are increasingly popular.”

“Encouraging investment in AIM shares and other unlisted companies is good for the broader economy as they create growth and jobs.”

“High inheritance tax bills have become a concern but there are steps that can be taken to cut the tax bill.”

The Publications section of our website contains more information on our high performing AIM portfolio service

 

 


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AIM for the end of the tax year

AIM, the London Stock Exchange’s international market for smaller growing companies has delivered terrific performance over the past 12 months, highlighting its growing maturity and the hugely improved quality of its constituent companies. We would strongly encourage investors seeking exposure to growing, profitable, cash generative, dividend paying smaller quoted companies to take a closer look at AIM this ISA season. If one adds the Inheritance Tax benefits, especially in an ISA wrapper, many AIM companies make a compelling investment proposition.

While the major equity markets have risen an admirable 20% over the past 12 months to date, the AIM All Share Index has eclipsed this with a rise of 29%. Inheritance Tax planning portfolios also continue to outperform and offer greatly improved liquidity compared with many years ago.

At the end of February 2017 there were 973 companies on AIM with the total market value £86.8bn, resulting in an average market capitalisation per AIM company of just over £89m. Looking back 12 months to February 2016 and AIM’s total market capitalisation was only £68.6bn but there were 1,029 companies, resulting in an average market cap per company of only £66.7m.

While there have been a large number of departures from AIM over the past 12 months, including several high quality companies like Fyffes, the importer of tropical produce, which was taken over in February, the vast number of leavers were perennial under-achievers whose time was up! For the first time in many months, February 2017 encouragingly also saw AIM new arrivals match cancellations with 5 departures and 5 genuine new arrivals.

Looking back again 12 months to 2016 and there were 4 AIM companies with market capitalisations over £1bn, with the aggregate market value of these £7.3bn. By comparison, at the end of February 2017 there were 8 AIM companies with market capitalisations of over £1bn with an aggregate value of £14.4bn.

A glance at the lower of end of AIM also supports our view of the improving quality of the market.
Back in February 2016 there were 232 companies (22.5% of the number of companies on AIM) with market capitalisations no greater than £5m. Fast-forward 12 months and this has fallen to 171 companies or 17.5% of the total at the end of February 2017.

However, the statistics don’t tell the true story. It’s the nature of AIM’s larger constituent companies that is really encouraging. Looking back further to 2011 and AIM’s Top 50 companies were dominated by mining and oil and gas companies, many of which were operating in faraway places and consuming vast amounts of cash. The Top 50 of 2017 is now dominated by profitable, cash generative companies that will be familiar to many, notably retailers ASOS and boohoo.com, the soft drinks groups Nichols (Vimto) and Fevertree Drinks and Breedon Group, the largest independent construction materials group in the UK.

While many companies in the Top 50 have significant operations overseas and are therefore currently enjoying a nice currency boost due to the weakness of Sterling, the management and centre of operations are predominantly UK based. This offers confidence to investors who may want to meet with management or carry out company visits – it’s certainly a lot easier assessing the investment merits of a retailer compared with that of an explorer in some far-off land!

The share prices of many of AIM’s largest companies have risen strongly over the past few months suggesting the valuations of some now appear somewhat stretched, however there are also plenty of more compelling opportunities among AIM’s smaller companies that are worthy of greater attention. Substantial AIM businesses like family controlled Watkin Jones Group, one of the UK’s leading construction and development companies or Smart Metering Systems who connects, owns and operates gas and electricity meters on behalf of major energy companies could have a very bright future.

Our AIM for Inheritance Tax planning portfolios can be accessed through our platform with Jarvis Investments or via the Elevate, Transact, Nucleus and Standard Life wrap platforms.

Take a closer look at AIM this ISA season!