Investments that help cut inheritance tax

Investing in companies that qualify for business property relief can reduce costs when your estate is passed on. Richard Beddard selects seven of the best.

In July 2016, we looked at ways to potentially reduce your inheritance tax (IHT) liability by investing in companies that qualify for business property relief (BPR). To qualify for BPR, a company’s main business cannot be investing in other companies or property (ruling out investment trusts, for example), and it cannot be listed on a recognised stock exchange. Once a qualifying investment has been held for two years, it is 100% IHT-free. London’s junior market, Aim, is not a recognised exchange, which means that stocks listed on it are ideal for building IHT-efficient portfolios.

Of course, it’s no use buying companies that qualify for BPR if they are otherwise poor investments, so we picked out five stocks that we viewed as attractive regardless of their BPR status. The good news is that the share prices of all five have risen nicely at a time when the wider index has risen by around 43% (although note that the wider index also includes Aim stocks that do not qualify for BPR).

However, while the credentials of our original picks System1 (previously BrainJuicer), FW Thorpe, and James Halstead, have been reinforced by the progress they’ve made, their share prices have risen so far that there may be better-value investments on Aim right now. So we’ve added two slightly more contrarian choices, Judges Scientific and Portmeirion, to our list, which is updated below.

One caveat: a company may currently qualify for BPR (we have checked these ones with the IHT-screening tool offered by Investor’s Champion), but that could change. The key point is that it needs to qualify when your estate is passed on. So it is vital to keep a track of your Aim holdings and their status.

System1 (SYS1): tipped at 346p, now 1,015p

Enterprise value: £130m

Debt-adjusted price/earnings ratio: 25

Traders rate System1 shares far more highly today than last year. The company’s market capitalisation has zoomed up from less than £50m to £125m. It has also had a name-change: “BrainJuicer” may have suited the quirky market research startup more than a decade ago, but it has since matured into a business with a very specific skill set.

System1 uses findings from behavioural science to work out how products and advertisements make us feel, and the new name comes from a metaphor popularised by Nobel Prize-winning psychologist Daniel Kahneman, to differentiate fast and intuitive thought (“System 1”) from slow and rational thought (“System 2”). While we think we’re rational, research from Kahneman and others shows we’re mostly guided by feelings.

System1’s behavioural emphasis distinguishes it from traditional market researchers and, the company says, makes its tests better at predicting how popular products and advertisements will be. The name may not be familiar to you, but it is to System1’s blue-chip customers – because the techniques it has pioneered are going mainstream. Results for the year to December 2016 revealed a return to double-digit growth after a two-year hiatus, during which contraction in its consultancy business had masked growth in its behavioural-testing products, which the company has long claimed are more scalable. Now most of its revenue and profit comes from rapidly growing products, which explains why the shares are more popular.

FW Thorpe (TFW): tipped at 214p, now 390p

Enterprise value: £400m

Debt-adjusted price/earnings ratio: 31

Commercial lighting fixture manufacturer FW Thorpe lit up the market once again with its half-year results in March. At Thorlux, Thorpe’s biggest brand by far, management resorted to high levels of overtime and shift work to meet demand. That meant profit did not rise quite as fast as revenue, although both saw double-digit increases. Thorpe has more than doubled revenue and profit in the last decade, as it has managed the tricky transition from incandescent to LED lighting. It should become even more efficient as it retires obsolete ranges.

James Halstead (JHD): tipped at 380p, now 512p

Enterprise value: £1,105m

Debt-adjusted price/earnings ratio: 30

Vinyl flooring manufacturer James Halstead is nothing if not consistent. Despite de-stocking by a significant customer in the UK and higher imported raw-material costs due to the weak pound, it still managed to put out record half-year results in March, partly due to the higher value of export earnings. The firm is more profitable than its rivals because of its strong relationships with specifiers (the companies that fit out commercial and public buildings and, in Halstead’s case, cruise ships).

Dewhurst (DWHT): tipped at 597.5p, now 673p

Enterprise value: £50m

Debt-adjusted price/earnings ratio: 11

Components supplier Dewhurst is enduring a public-spending squeeze in the UK, which has hit sales at the company’s Thames Valley Controls subsidiary particularly hard. Although demand remains subdued, profit for the full year to September 2016 was broadly flat thanks to orders from abroad. Since Dewhurst exports most of the lift components it manufactures, it’s also been helped by the weaker pound. Although profit depends on construction and refurbishment projects and Dewhurst is adjusting as touchscreen technology reduces demand for push-buttons (one of Dewhurst’s specialities), the company has remained highly profitable by diversifying its range and growing globally. The recent acquisition of an Australian liftcar interior manufacturer is another step in this direction.

Solid State (SOLI): tipped at 297.5p, now 433p

Enterprise value: £40m

Debt-adjusted price/earnings ratio: 10

This manufacturer and distributor of electronics will announce its results for the year to March 2017 in July, but it has already revealed that profit will be somewhat lower than in 2016. Investors shouldn’t be concerned though. Solid State is profiting nicely from niche markets in rugged computer, battery and communications technology. The company remains highly profitable, and the comparison with last year is slightly unfair – those results were boosted by a confidential one-off payment from the Ministry of Justice, after it walked away from a contract to make electronic tags for convicted criminals.

Judges Scientific (JDG): new tip at 1,690p

Enterprise value: £120m

Debt-adjusted price/earnings ratio: 21

Judges Scientific is a serial acquirer of scientific equipment manufacturers. It buys small private companies who supply niche markets that it deems capable of sustaining high levels of profitability. Despite the high quality of the earnings of these companies, Judges can buy them cheaply because they are relatively unknown.

Its subsidiaries have experienced inconsistent demand in recent years, though, because their biggest customers – universities around the world – rely heavily on public funding, which has also been inconsistent. Revenue and profit fell in the full year to December 2016 despite five small new acquisitions, but Judges remains profitable and cash generative, and should become more so as and when demand improves.

Portmeirion (PMP): new tip at 848p

Enterprise value: £105m

Debt-adjusted price/earnings ratio: 15

The solid run of growth enjoyed by Portmeirion since the credit crunch came to a halt in the full-year to December 2016 when – despite the contribution of Wax Lyrical, a scented candle maker acquired earlier in the year – profit fell. Portmeirion is a famous brand of tableware that owns two other famous brands: Spode and Royal Worcester. These have proved rich sources of profit over the years and Portmeirion expects Wax Lyrical will be too, as it complements its tableware ranges with candles and reed diffusers, and sells the new products through its bigger distribution network.

However, that network failed Portmeirion in 2016. A huge jump in sales in India in 2015 proved to be a flash in the pan, and economic stagnation in South Korea – Portmeirion’s third-biggest market after the UK and the US – has sent its fastest-growing market into reverse. But in time, South Korea should recover; the company has appointed new distributors in India who may turn things around there; and it has spare capacity at its newly equipped factory in Stoke to meet rising demand.