Taking AIM at IHT’s sacred cow?

Where’s the beef?

Aim is, once again, being taken against sacred cow of IHT reliefs?

Eh, sacred cows and IHT. I must be talking about Agricultural Property Relief (“APR”)?

Almost.

I’m talking about Business Property Relief (BPR)[1].

The FT reports today that a 68 estates, all with business assets worth more than £5m, claimed BPR on the estates totaling £1.8b.

Although these 68 estates represent just 2% of claimants, it represents 57% of the value of assets benefitting from the relief, according to the article.

For some sitting on the left, this might be bad enough. Tax reliefs benefiting the richest in society and all that.

But, for those who are frothy of mouthed already, it will get worse.

The thing is, BPR is not simply restricted to shares (or other interests) in family businesses or trading companies in which the deceased (or transferor) were actively pursued in.

Rather, the relief extends to baskets of shares in most (not all) of the companies listed on the Alternative Investment Market (“AIM”).

The 68 estates mentioned above (representing just 2% of claimants) secured 69% of the relief claimed in 2020/21.

But let’s rewind.

IHT Business Property Relief

IHT Business Property Relief is a tax relief which, where it applies, provides for a 100% or a 50% exemption against IHT on either a lifetime transfer or on death.

The rate depends on the type of asset in question. However, in this context we are considering how it applies to shares. Where one holds shares in an unquoted trading company for two years then the relief is 100%.

Not too shabby.

The first relevant question is what is an unquoted company? Easy I hear you say. One that is not quoted. Move on.

However, this answer is only half correct. If your company is not quoted then it certainly is unquoted. However, if the company is quoted on Alternative Investment Market (AIM) then it is, well, still unquoted.

Of course it is.

In the absence of any other requirements, it is therefore possible for a retired person, say Mrs Miggins, to invest, say, £1m of cold hard cash into a basket of AIM shares.

After two years (or less if one is investing as ‘replacement property’) then the potential IHT liability of £400k is completely removed once the holding period is satisfied.

There is no need to have any involvement in the business. Just ask your financial adviser to pick the shares or the retail product containing them.

It is worth noting that not all AIM companies will qualify for BPR as some will not meet the definition of ‘trading’.

For example, a company that is mainly investing or, say, dealing in land will not qualify even if the shares are listed on AIM as they do not meet the trading requirement.

Strange results?

For me it seems rather strange that a person can obtain an incredibly attractive business tax relief whilst having no involvement or material interest in the business.

One might say that investing in a basket of shares on AIM is likely to be volatile experience. This is risk. However, this is investment risk and not business risk.

Indeed, in recent years, retail products have emerged trying to protect from this volatility / risk.

One could draw an interesting comparison between the case of Mrs Miggins, who gets BPR relief and the substantial curtailing of reliefs for professional landlords who now potentially pay tax on phantom profits if they have leverage.

But this is UK tax.

So, batsh@t craziness pervades.

Discerning the policy intention

Of course, like most things it is not simple.

There will be long term shareholdings in family businesses which are now listed on AIM. Should these shareholdings be outside of the scope of BPR?

My view is no.

It must be the case that BPR was made available to reward entrepreneurial behaviour and allow the wealth created through such endeavours to be passed to the next generation without such businesses being broken up.

A case could also be made for employees who own shares in their companies and these have now become listed.

The difficulty is how does one make a distinction between AIM shareholdings that:

• Are owned by the deserving: family ownership of the business and employee / director shareholdings; and
• Passive investors

A solution?

It is my view that for a holding in AIM shares (and any unquoted shares) to qualify then the investor should be required to meet other conditions.

For example, in order to qualify for BPR, a shareholder of an AIM company might be required:

• to hold a material interest in the Company such as 5%: This could be aggregated with other family members holdings; and / or
• to be an employee or director of the company

Of course, my view assumes that BPR is available to reward entrepreneurial behaviour and allow the wealth created through such endeavours. It is quite possible that I may not understand the policy intention.

Again, it’s the UK tax system, so we must suspend logic.

However, the alternative, that the Government of the day thought that it was better to inflate the AIM through the provision of generous tax reliefs to passive investors would seem rather strange.

Consequences?

Of course, we don’t understand the extent to which AIM relies on this type of money.

Conceivably, removing relief might cause a correction in the market as it becomes less attractive.

I am unaware of any figures which try to quantify this.

But, even if it does, this seems like an odd distortion as to how passive capital is invested.

Why should the AIM generally benefit?

Why should some companies on the AIM market – those that qualify as trading companies – when others that are listed (investment companies) do not.

Conclusion

It would be interesting to see the proportion of BPR relief given to those passively investing in AIM shares. However, I have not seen any figures on this. They may not exist.

However, BPR was primarily designed to allow the owners of family businesses to pass on the shares to the next generation without a tax hit.

My view is that THIS makes sense from a policy perspective. Whether you agree with it or not, there is a rational justification for allowing shares in family businesses to be passed to the next generation without the tax man taking a chomp.

Can the same be said for a pensioner who has merely invested their cash in to a retail portfolio of shares?

My view is that it can’t.

Other views are available.

 

[1] I am aware that some upstarts call this Business Relief. However, I remain a BPR purist. It is a hill I am prepared to die on.