UK Edition
Questor: new additions to our IHT Portfolio highlight the pitfalls of investing on Aim
We return this week to our Inheritance Tax Portfolio, which consists of stocks quoted on the junior market, Aim, that can be passed on to your heirs free of death duties. We publish updates on two of our existing holdings and add seven new ones to the portfolio.
Update: Gama Aviation
Shares in Gama, the aviation services group, fell by 12.2pc on Tuesday after it said trading this year was “flat”. The shares are now 15.5pc below where we tipped them for this portfolio in January.
Nick Hawthorn, of Downing, which owns about 6pc of Gama, said “we are not sellers, we think this is a great quality business with a lot of potential over the long term”. He said the update had been poorly worded and that a consequent reduction in one broker’s earnings expectations had hit the shares.
“The US is trading very well, there are cost efficiencies ongoing [but] European maintenance contracts are expected to come through in the second half of the year,” Hawthorn said. “This [delay] led to the caution in the trading statement.
“There is execution risk but we are comfortable with expectations for the full-year outcome. It is worth remembering that this puts the company on a multiple of less than 8 times 2019 earnings. It still has more than $25m (£18.6m) to deploy on earnings-accretive deals.”
He added: “There is work to do on market perception and sentiment, which was acknowledged in the update. The company is fully funded to deliver on its strategy. The management team has been bolstered and contracts have been delayed but not lost during the period.” Hold.
Update: Scapa
Scapa, which makes industrial and medical tapes, suffered a severe share price fall in April when the company announced, alongside a satisfactory trading update, that one of its workers had died in an industrial accident. Questor’s paper loss is 11.2pc.
Keith Ashworth-Lord, who owns Scapa in his SDL UK Buffettology fund, said: “The share price drop can be justified only were Scapa’s reputation to take a big plunge. Though I don’t like to stand accused of profiting from tragedy, we have increased our holding as a result of the market reaction. Ultimately, this is a ‘black swan’ event that couldn’t have been foreseen and is awful for all involved.” Hold.
New Aim stocks for the portfolio
Several stocks tipped in Questor’s other formats are worthy of a place in our Inheritance Tax Portfolio.
The Aim-quoted shares we have covered recently include TruFin, a specialist finance firm, boohoo.com, the online fashion retailer, PTSG, an engineering group, Majestic Wines, Nichols, the maker of Vimto, Anpario, the animal supplements firm, First Derivatives, a software group, and Manx Telecom.
Before we can add any of these stocks to the IHT portfolio, however, we need to be sure that they will qualify for “business property relief”, the tax break that confers exemption from death duties.
We asked Chris Boxall, of Fundamental Asset Management, an Aim specialist, to check eligibility. His answers illustrated some of the pitfalls of Aim shares’ IHT exemption.
His firm’s research found that TruFin had a 15pc investment in Zopa, the peer-to-peer lender. This minority stake was valued at £33.9m on TruFin’s balance sheet in June 2017, representing 79pc of its total equity. “It was therefore very significant and in our opinion would be considered an ‘excepted asset’ and suggests the status of TruFin as a quasi-investing company,” Boxall said. We will therefore not add TruFin to Questor’s IHT Portfolio.
First Derivatives, by contrast, appears to break the IHT exemption rules because it is also listed on the ESM, Ireland’s equivalent of Aim. Normally dual-listed stocks do not qualify for the tax break but Boxall said an ESM quote “does not meet the definition as ‘listed’ for HMRC purposes and therefore First Derivatives is still IHT-qualifying”. He added that “many Aim investors get confused by ESM listings”.
In light of this we can now add boohoo.com, PTSG, Majestic Wines, Nichols, Anpario, First Derivatives and Manx Telecom to the Aim portfolio.
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