Buy resurgent pub group Young’s for growing profits and to beat death duties
SURGING stock markets mean that inheritance tax is a potential problem for growing numbers of Questor readers. (Those Questor readers who don’t yet confront such a problem will, we hope, arrive at it in due course.)
The threshold at which assets can be passed on tax-free has been frozen at £325,000 per person since 2009-10, with the only increases coming via new allowances attaching to property.
In an attempt to help readers – many of whom have written in with explicit requests for advice on this topic – Questor today begins a new series of regular tips on stocks that, if owned on death, should fall outside of the owner’s estate for inheritance tax (IHT) purposes.
The will appear here once a month, complementing Friday’s usual
Those of you who follow the
will still see the full holdings published here on the first Friday in each month. All articles are available online at telegraph.co.uk/questor. Firms listed on the junior Alternative Investment Market (Aim) can qualify for 100pc relief from IHT as long as they are held for two years and remain in ownership at death. Since 2013 there has been an especially attractive aspect to this perk: Aim shares have been allowed within Isas. Pensions are already IHT-exempt but Isas on the other hand are taxable. The holding of Aim shares is thus an excellent way to limit death duties on what for many is their biggest pool of non-property, nonpension assets. The difficulty is that not all Aim shares qualify. The tax break exists only for businesses (or parts of businesses) that HMRC deems “trading” companies. Originally introduced to ensure family businesses could pass to heirs tax free, investment business are excluded. Investment trusts, both conventional and real estate, fail the test but so too can traditional trading firms that build up excess cash or assets that may be seen as investments. In these cases, IHT relief may be granted partially or not at all. HMRC makes this determination based on the tax year when death occurs.
We aim to build a list of 15 to 25 qualifying and attractive Aim stocks. Founded in 1890 Young’s is now focused solely on managing over 250 pubs (some of which are also hotels) after shedding its brewery business in 2011.
The company is split into three: managed pubs under the Young’s brand; the Geronimo brand; and tenanted pubs run as part of the Ram Pub Company. Pubs are in the prime areas of the South East, particularly wealthy south-west London close to where the businesses originated.
Pre-tax profits rose to £37m in the year to April 2017, up 13pc on last year, an increase of almost 100pc over five years. This is even more impressive when viewed against pub industry challenges of rising alcohol duty and business rates.
The attractive portfolio of properties is now only lightly mortgaged.
In many cases, there is not an incentive for businesses to retain the tax break, technically known as “business property relief ”. For this reason Questor favours firms with large family stakes – and Young is one such, with family members owning a significant proportion of the business via individual stakes. Their selfinterest in reducing their own tax liability is comforting.
Respected investment firm Lindsell Train has a large shareholding as does Octopus Investments, one of the leading providers of portfolios aimed at limiting IHT for clients.
Unusually with Young, investors have a choice of “A” ordinary shares (ticker: YNGA) or ordinary shares without voting rights (YNGN). Investors’ economic rights, the share of profits, assets and so on, are identical. The difference is that “A” shares give shareholders’ the right to attend, speak and vote at the annual general meeting.
For the majority of private investors with relatively small investments, the non-voting shares offer a better yield right now, as dividends are paid equally. At yesterday’s price of £10.28, the non-voting shares trade at a 24pc discount to the voting shares and yield 1.8pc. The voting shares yield 1.4pc.
Over time “A” and non-voting shares have tended to perform in line. Questor says: Buy Ticker: YNGA / YNGN Price: £13.51/ £10.28