Business Relief funds are very popular with some advisers and clients.
In fact, we use them with some clients where it is the right advice. The total market for specific Business Relief funds is £9 billion in the UK currently.
If you invest in one of these funds you have the benefit of access to your capital, but it is capital that you can pass free from Inheritance tax to your beneficiaries once you have owned it for just two years.
It is the fastest acting IHT relief available.
Business Relief specific funds (as opposed to EIS funds which is benefit from Business Relief) tend to invest in lower volatility assets such as physical infrastructure (wind turbines, solar farms, self-storage units etc), commercial forestry and property lending. The price of these assets is less volatile than a stockmarket investment but not without a risk to capital as prices can move, particularly depending on demand.
The government have recently introduced a cap of £1 million per person in these funds from April 2026 but for most people that is more than enough. So given the fast-acting IHT relief why doesn’t everyone have these funds.
Well apart from the political and liquidity risks, there is one major drawback. These funds tend to produce very modest returns compared with standard stockmarket investing. This means that it is often not the right advice for younger IHT planning clients. Younger in the context of IHT probably means those in their 60’s and 70’s.
The problem is that it might be better to invest, receive 7% per annum and then die owing 40% Inheritance tax, than investing, receiving 3% per annum and dying with tax free capital. The break-even point is 14 years. Meaning if you live for more than 14 years you would have been better off staying invested in mainstream investments, even after inheritance tax. So, care must be taken when considering these funds.
They can work well for those who have limited life expectancy, need a faster acting solution than a seven-year gift allows and want to retain access to their capital. The political risk is also one to be aware of, the last budget saw a cap on this type of investment brought in and it is possible that what qualifies for this relief might be reviewed and tightened in the future. This could lead to an outflow from these funds and a problem with liquidity.
If you are interested in discussing this and/or the alternatives do get in touch. We are currently advising people on their IHT position from our offices in Hook, Hampshire and throughout the UK.