Rights issues in the Business Relief market

We all know in life that two wrongs don’t make a right.  But is there ever a situation where two rights could result in a wrong?

Rights issues in the Business Relief market are hot topic amongst the financial advisory community, with at least five of the main operators of unquoted BR qualifying strategies currently offering existing investors the opportunity to acquire further shares proportionate to their existing holdings.

What is a rights issue and what are the benefits?

A rights issue is an offer to existing shareholders of a company to purchase additional new shares in that company (commonly at a discount to market price).  By taking up their rights, existing shareholders are therefore increasing their financial exposure to the company.  Many companies will undertake a rights issue to generate the capital required to take advantage of a particular business opportunity they have identified.  Further, should a company that is offering a rights issue be unquoted and a trading business then, under current UK tax law, the issuance of these new shares should fall within the reorganisation of share capital rules and as such should immediately qualify for full relief from inheritance tax, therefore bypassing the usual two-year qualification period required for the asset to fall out of the individual’s estate.

Double down, or think twice?

On the face of it, this sounds like a good trade, but as with all things in life, an individual’s personal circumstances will dictate whether or not taking up the rights issue makes financial sense.  Let’s consider the case of Mrs Smith, a 76 year-old in good health with a BR qualifying investment that she has held for three years.  A “two-for-one” rights issue is announced (i.e. Mrs Smith is entitled to subscribe for a further two shares for every one that she currently owns) and Mrs Smith discusses her options with her financial adviser.  Given she has held her existing investment for three years, the shares acquired under the rights issue should immediately qualify for BR, which sounds appealing on first inspection.  However, the adviser highlights that by taking up the rights issue her concentration risk to the company in which she is currently invested increases significantly.  Given her current good health and expectation that she should live for at least another two years, the adviser recommends a further BR qualifying investment with the money Mrs Smith has available, but into a different company with an alternative trading strategy to increase her portfolio’s diversification which should, by definition, spread her risk in what is an already risky investment arena, particularly for those displaying characteristics of vulnerability.  Whilst not taking up the rights issue may lead to Mrs Smith experiencing the impact of dilution on her existing investment, it is felt the long-term benefits of a more diversified portfolio should outweigh the potential short-term disadvantages.

This is of course not to say that rights issues aren’t the correct course of action for all – there will inevitably be those investors who maybe don’t expect to survive a full two years for whom the rights issue will be an incredibly powerful piece of later life planning.  However, the devil is forever in the detail and as such the question should be asked of every investor considering such an opportunity “could two rights result in a wrong”?

 Written by:

Dan Perkins, Chief Commercial Officer, Great Point Media 


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