As the values of people's estates continue to rise, a growing number of families will develop potential IHT bills, making effective estate planning - including business relief - an increasing priority, says Jack Rose
This tax year more than any previously it feels as if tax-advantaged investments have stepped out of the shadow and into the mainstream for many advisers. As the frenzy of VCT and EIS investment for the 2016/17 tax year subsides, advisers' attention can return to long-term inheritance tax (IHT) planning making use of business relief.
In the last tax year alone, an estimated £1.1bn was raised into IHT strategies that used business relief - a 22% increase on the previous year. So what are the benefits and why are more people starting to consider these type of solutions alongside some of the more traditional estate-planning options?
Without doubt, the biggest driver has been the increasing number of families with potential IHT liabilities. IHT receipts rose to a record £4.7bn for the 2015/16 tax year and are forecast to exceed £5bn for the 16/17 tax year just finished.
Increasing asset values have been at the root of this problem. On average, house prices across the UK have risen by 25% in the last five years and the rise in the South East has been even greater.
There has been much discussion surrounding the new residence nil-rate band, which is being phased in from this tax year, and how it could potentially alleviate IHT pressures for many families. Strict rules around who the property can pass to and the taper threshold of £2m on estates will, however, mean many will not see the benefits of the new measure.
As the assets in their estates continue to rise over time, an increasing number of families will develop potential IHT bills, making effective estate planning an ever-increasing priority. Due to the flexibility, control and speed afforded to business relief, it has become a popular IHT solution.
There are a few different ways to access business relief, including private business ownership and Enterprise Investment Schemes. There are also business relief products structured by providers, which usually take the form of a discretionary management service and will either be focused on investing in AIM stocks or have a capital preservation mandate, such as leasing or secured lending.
As the market for IHT planning products has grown dramatically in the past 10 years, investors are now confronted with a wide of choice of investment strategies. There are some 60 or more different business relief strategies within the IHT space across a variety of asset classes, including renewable energy, secured leasing/financing, property lending and AIM company investment.
Potential target returns also vary from cash plus to equity-like returns, although the majority of products offer returns in the range of 3% to 6% alongside capital protection. With the Bank of England's base rate at 0.25% and inflationary pressures growing, you can see the attraction.
As the IHT space grows and matures, so there are an increasing number of product providers that can demonstrate track records of delivering such returns across multiple market cycles. Although, of course, it should go without saying any past performance is certainly no guarantee to future performance.
Belinda Thomas, a director of Triple Point Investment Partners, which has specialised in IHT products for more than a decade, agrees. "Business property relief-qualifying investments are increasingly becoming more mainstream as a complementary addition to client's existing portfolios, given that their returns tend to be uncorrelated to the traditional asset classes," she says.
The following graph provides a striking illustration of these steady uncorrelated returns against wider equity markets.
Source: LGBR Capital
For investors keen to research the market, there are a number of independent sources that offer due diligence and research such as The Tax Shelter Report, The Tax Efficient Review, MiCap and Hardman.
As with most investments a diversified approach is a prudent way to manage some of the risks. It is important, however, not only to use different product providers but also to diversify by underlying trade or business sector of the investee companies.
The last aspect to consider is accessibility. Many of these solutions are structured as discretionary management services that invest in one or a small number of unquoted businesses, which means the risk profile will not be suitable for all investors.
For advisers who are recommending these types of strategies to clients, there are also considerations around PI and compliance. Furthermore, they are also not available on mainstream platforms, which increases accessibility issues.
In conclusion, the benefits of business relief strategies, such as speed of IHT mitigation, control for the investor in directly owning the underlying asset, replacement relief and Power of Attorney make them useful estate-planning products. While not without risk, they can also provide an attractive yield in today's low income environment, alongside their main capital preservation objective.
Investors and their advisers should, however, have assessed important considerations such as diversification, the business sector and the expertise of the provider's investment team.
Jack Rose is head of tax products at LGBR Capital
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