Foresight Inheritance Tax Solution
Foresight is one of the most popular choices for investors wishing to protect their wealth from IHT. It launched in 2012 and makes use of Business Property Relief (BPR) where investments in certain businesses should be free of IHT after two years.
- Capital preservation focus
- One of the more diversified IHT portfolios, investing across various infrastructure areas uncorrelated to stock markets
- Highly experienced manager
- Target return of 3.5% p.a. (not guaranteed) with a history of delivering this over the past three years (note past performance is not a guide to the
- Annual management charge only applied after a return of 3.5% has been met
- Minimum investment £25,000
The Foresight Inheritance Tax Solution is a managed service investing in unquoted companies which should qualify for BPR and therefore benefit from IHT relief after two years.
When you invest you acquire shares in a trading company operating in a way that is focused on capital preservation and designed to qualify for BPR.
Each investor is exposed to a range of infrastructure projects: solar infrastructure, energy efficiency, smart metering and Private Finance Initiative (‘PFI’), making this one of the most diversified services in the market.
Irrespective of the sector, all projects share two characteristics which should be very valuable to investors seeking IHT protection:
- They are secured either against long-term contracts with the government and blue-chip companies or against assets or loans – tying in with the capital preservation objective
- They produce contractual revenue streams – so your investment should not suffer from high volatility and returns should not be affected by stock market movements
A closer look at some of the sectors will clarify how this works in practice.
Solar power has long been a staple of tax-efficient investing, largely because it produces relatively stable and predictable risk-adjusted returns.
Foresight ITS owns 20 solar trading plants. Each plant benefits from the income produced by selling the electricity generated. In addition, solar power plants accredited under the government’s RO or FIT schemes receive 20 years of index-linked income from the subsidies, which substantially increases their returns and provides some inflation proofing.
The UK government in conjunction with Ofgem, the energy market regulator, has mandated that by 2020 all properties (residential and commercial) should have a smart/advanced meter.
Energy suppliers are responsible for the roll-out the installations, but they’re reluctant to own smart meters – partly because customers are now encouraged to switch supply with ease. Instead, they lease the meters from specialist companies (known as Meter Asset Providers) for a set period, with the cost passed on to consumers. So, once installed, smart meters are a source of contractually secured income.
Foresight works in partnership with an established Meter Asset Provider. It acquires fully installed and tested smart meters that are under long-term contracts with energy suppliers and receives the rental yield for the duration of the contract, typically up to 10 years. This yield is sufficient to repay the capital used to acquire the meters and to cover interest payments, thereby mitigating the investment risk.
At the end of the contract, the Meter Asset Provider can continue to rent the meters or buy them for a nominal sum. There is also a growing secondary market, which could provide the opportunity for an exit before the end of the lease.
Private Finance Initiative (‘PFI’)
PFI is an established scheme introduced by the government 24 years ago to enable private funding of public sector infrastructure projects. So far around 900 projects have been procured through PFI with capital value of over £70 billion.
Typically a local authority (e.g. a council) enters into contract with a consortium of private investors to build and maintain an infrastructure project (e.g. a school or a hospital). Projects have a high-risk construction phase, followed by a lower-risk operational phase. It is common that as the project enters the lower-risk phase, the original investors are keen to sell their holdings, thereby creating a secondary market.
It is the secondary PFI market that interests Foresight. An investment in secondary PFI offers long-term inflation-linked revenues, predictable cash flows (the interest rate is typically fixed for the duration of the investment) and low correlation to equity markets. Moreover, the debt is underwritten by the UK government.
Secondary PFI is popular amongst pension funds and other institutional investors.
Foresight ITS invests in three educational projects (comprising seven schools) and four healthcare projects.
Energy efficiency projects typically involve helping corporations and public sector bodies lower their energy usage and costs.
Investment returns come from the financial value of the energy savings which are apportioned between the customer and the company established by Foresight. The cash flow returns to investors are amortising with no exit required at the end of the investment. Moreover, the investment is underpinned by the physical ownership of the energy saving or energy generation equipment.
Foresight aims to deliver a minimum return of 3.5% each year to investors, once management fees, administration fees and corporation tax are considered, although this is not guaranteed. The return is uncapped, and any out-performance accrues to investors. The annual management charge is refunded to investors if they have not received a cumulative priority return of 3.5% in each year after the second year.
The portfolio currently invests in trading company Averon Park Ltd. The graph below shows performance to 31 December each year, based on most recently available figures and the minimum cumulative return for all investors in the portfolio, assuming they invested across the entire 12 month period.
Foresight Group started as a technology specialist in 1984 and launched one of the first VCTs in the 1990s. It then diversified and became one of the leading renewable energy, infrastructure and PFI investors.
Today Foresight manages c.£2.5 billion across a range of VCT, EIS, IHT and institutional products. Its clients include some of the world’s leading financial institutions (Blackrock, Schroders and Baillie Gifford to name but a few), public sector organisations, pension funds and insurance companies.
Foresight’s Richard Kelly runs the Foresight ITS and acts as the initial screen for new investments.
As with many unquoted IHT products – and unquoted shares generally - there may be limited liquidity, however Foresight endeavours to effect withdrawals within 15 working days of written receipt. Foresight is keen to ensure all the underlying investments can stand on their own irrespective of BPR and have sufficient attraction to be sold within 6-12 months at fair prices. However, this is an investment making a series of unquoted investments therefore liquidity is a risk.
Your capital is at risk and you should not invest money you cannot afford to lose.
Under current rules, BPR-qualifying investments held for at least two years on death are exempt from IHT, but remember tax rules can change and tax benefits depend on circumstances.
Fees and charges
An overall summary of the charges is shown below. Please read the provider’s documents, and the Key Information Document, for more information on fees.
|Full initial charge||2.5%|
|Annual management charge||1% plus VAT|
|Annual administration charges||1.65%|
More detail on the fees
In our view the Foresight ITS is well thought through, keenly priced and has thus far delivered on its objectives. Foresight has a capable and very credible management team and the product sufficient scale to give a wide range of underlying investments. The nature of these investments should mean that long-term returns are consistent, though of course there are no guarantees. This IHT service comes highly commended.
The Chancellor has requested a review of a range of aspects of IHT to simplify the tax system. The review timescales, its scope and impact are unknown. Currently, investments qualifying for Business Property Relief should be free from IHT after two years. Tax rules can and do change and benefits depend on circumstances.
Wealth Club aims to highlight investments we believe have merit, but you should form your own view. You should decide based on the provider's documents and ensure you have read and fully understand them before investing. This review is a marketing communication. It is not advice or a personal or research recommendation to buy the investment mentioned. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination. 11 September 18
- Lending & renewables
- Portfolio size
- £423.0 million
- Initial charge
- Saving via Wealth Club
- Net initial charge