Review – Downing Estate Planning Service

Archived article

Archived article: please remember tax and investment rules and circumstances can change over time. This article reflects our views at the time of publication.

Shares in unquoted trading companies typically qualify for Business Property Relief (BPR), which after two years of being held fall outside of an investor’s estate for inheritance tax purposes. Many businesses qualify, including those that lend money and those that invest in businesses with substantial assets such as property. 

Highlights

  • Choice of asset backed or renewable energy strategies
  • Mix of loan and equity investments
  • 4% annual target
  • Experienced management
  • Minimum investment £50,000

The manager

Downing LLP is owned by its partners and specialises in tax-efficient investments, including VCT, EIS and IHT. It currently manages over £700 million, of which £183 million is currently invested in this service. Jonathan Boss who heads Downing’s asset backed team and Colin Corbally, who leads the renewable energy team, are the key individuals responsible for investments within the Downing Estate Planning Service. 

Target Return and strategy

There is an annual target return of 4%, net of fees and corporation tax. 

Investors buy into one or both of Downing’s IHT trading companies within the Downing Estate Planning service: Pulford Trading Ltd is their asset-backed company and Bagnall Renewables Ltd is the renewable energy one. If an investor doesn’t choose, Downing will invest in both companies, with the split dependent on deal flow at the time. 

Preservation of capital invested and a reliable yield are two key aspects that Downing’s management looks for when considering an investment opportunity in either area. So asset-backed businesses must trade from freehold property and renewable energy projects need a known income stream from feed-in-tariffs, renewable obligation certificates, or the sale of electricity. 

In both companies there is a mix of equity investments with growth potential and straightforward loans to companies. The loans provide the on-going liquidity. 8% yield plus equity upside (in the growth deals) is the minimum Downing wants from each investment. As with the majority of Downing’s investments, the team prefers to back known management teams they have invested in before. In addition, should the companies run into financial difficulties, Downing has priority charge over the assets before the company’s own management, to give investors a better chance to get their money back. 

Asset backed – Pulford Trading Ltd

The asset-backed side is dominated by investments in care homes and pubs. Care homes are typically purpose built with 80-90 beds in decent areas. Downing likes investing in Scotland as there is an element of support from the state that isn't means tested. All Scottish care homes are run by one management team. Prior to making an investment in a new facility, Downing conducts market research to establish market demand and potential fee levels.  

The lending side of Pulford will typically provide development finance for student accommodation with a loan term of about 12-24 months. Downing is comfortable taking construction risk in a deal, however having first charge over the assets is essential. It won’t do speculative residential developments. 

Renewable Energy – Bagnall Renewables Ltd

Downing likes building projects rather than buying existing and already energy-generating projects. This is simply due to the potential for higher returns available. 

This service only invests in UK renewable energy projects. Anaerobic Digestion plants (turning waste or food stock into energy) form the bulk of the renewable projects completed thus far as they offer the potential for higher long-term returns than other forms of renewable energy according to Downing. All Downing’s AD plants use crops supplied under contract and turn it into energy, which helps achieve consistency. Other AD plants use waste, instead, which is more inconsistent. As well as AD, solar, wind and hydro electricity generation also feature. A project will only be considered once planning has been achieved and connection to the grid agreed.

The charts below show the split of investments across both companies currently. 

Wealth Club - Downing Estate Planning Service - sector allocation

Finally, there is the added benefit of an insurance policy covering the first 20% of any losses (after charges) for those under age 90 at the time of death. The maximum claim is £100,000 per investor. The insurance policy is included (and paid for) by Downing for a minimum of two years. This is an excellent added feature at no additional cost to investors and helps protect the portfolio in the event of losses in the first two years whilst investors await IHT-free status.

Performance

Both companies launched in early 2013, the charts bellows show performance since then.

Wealth Club - Downing Estate Planning Service - performanceRisks

Liquidity is only provided on a six-monthly basis therefore there may be a delay in receiving funds if needed urgently. This ties in with Downing’s valuation process: the underlying businesses are only valued once every six months.

Fees

The annual fee is 2% plus VAT; the initial charge is 4%. There is a performance fee of 20% of returns over 4% compound per annum, charged at exit. In addition, Downing may receive arrangement and monitoring fees from the underlying investments, unless they are simply lending money. Arrangement fees are capped at 2%. Monitoring fees are capped at 0.5% each year.

Summary

This is a well thought service that has delivered consistent returns to investors, although there is no guarantee it will continue to do so. Downing’s management in the areas of focus are high quality and experienced. One downside to this investment is the performance fee – somewhat unusual in inheritance tax products. That said, the overall fee structure is still competitive. The Downing Estate Planning Service is worthy of consideration. 

See more details on Downing Estate Planning Service