ShareSoc member Mark Lauber dissects the inheritance tax service from Rockpool Investments
Hardman has issued a research piece on the Rockpool Inheritance Tax Service. Fair play to them for outlining the various fees, charges and costs, but the more I read the more I scratched my head as to whether this is really worthwhile for investors.
The underlying strategy is to obtain Inheritance Tax relief on lending to SMEs, with loans on a senior secured basis via Novus Lending Limited. The portfolio has 24 loans and AUM is currently £20.3 million, managed by Rockpool. After 2 years of ownership, they should be free of Inheritance Tax. The target return is just 4% per annum, though the long–term return of the fund has been slightly below that since 2012 due to some credit losses in 2019. It seems that these loans are granted at the same time as equity investments are arranged by the same Manager, which gives a potential conflict of interest as the equity investors and debt investors are not the same people.
At first glance, it seems like a relatively low risk (but low return) way of sheltering some assets from Inheritance Tax. But is it really worth it? Reading through the Hardman report (again, kudos for transparency), you can see the following fees charged to investors:
There is currently no initial fee (was 2% until Jan 25). Then there is an annual fee of 1.5% of the loans outstanding (reduced if the target return of 4% is not reached). There are also some small administrative and legal expenses. Mercifully, there is no exit fee. That’s on the investor side. Within the lending vehicle Novus, there is a 25% corporation tax charge, in addition to any provisions for bad debts which average a little over 1% per annum over the last 5 years.
On the borrower side, there is a 2% per annum monitoring fee and a pretty hefty 10% arrangement fee. While these last two are not directly borne by the investor, they contribute to a very substantial differential between what the borrower pays (which reflects the risk of the loan) and what is left for the investor. All of this brings a gross return of 10.1% in the 2024 financial year down to just 5.8% for investors. Looked at over a five-year horizon, a table indicates that on an investment of £100,000, nearly 65% of the total return is lost in direct charges, indirect fees, other costs and corporation taxes.
Liquidity seems to be quite restricted, trading on a matched bargain basis or via company repurchase (if funds are available). Rockpool aims to satisfy redemptions within three months, though it has averaged four months over the past two years.
Does it work? Rockpool obtains an annual opinion from PwC on the eligibility of the product for Business Relief (BR), but as it does not track claims it is unaware of whether claims are successful or not.
Is it worth it? It’s certainly a clever idea. The potential IHT benefits are quite significant but must be weighed against very high fees and costs, credit risk in the portfolio, potential conflict of interest, illiquidity, a 2-year holding period for BR eligibility, and lack of evidence whether HMRC accepts or rejects IHT claims. It’s not for me I’m afraid.
Caveat emptor!
Mark Lauber, ShareSoc member
This article reflects the opinions of its author and not necessarily those of ShareSoc.
