Is Business Relief for the chop?
Since the Office for Tax Simplification (OTS) July 2019 report on IHT, there have been questions about whether business relief (BR) will continue to be offered on AIM shares. The OTS questioned: ‘Is the treatment of AIM shares within the policy intent of business property relief [or Business Relief as it is now known]?’ With the enormous increase in government borrowing precipitated by the COVID pandemic, this question is being asked again in the light of potential increases in taxation to offset the pandemic expenditure. Business relief is seen by some as an obvious target for the chancellor's attention. In this note I offer some thoughts on the matter. Please note we are not tax advisers and any investment made for taxation benefits should be made in the context of the individuals’ personal circumstances and with appropriate professional advice.
It’s possible
Removal of the IHT relief is always a possibility. The primary rationale for business relief is to allow large family interests in companies (and some other assets) to be passed to the next generation intact without forcing the sale or breakup of the business to fund a large inheritance tax liability. The widespread use of this relief to shelter third party investors from IHT was never intended. The question that I am often asked is whether companies traded on the AIM market are likely to lose their exemption as, for the most part, the share registers are not dominated by founders, nor their descendants.
But not as easy as it sounds
I am not sure that it is an “easy” relief to get rid of without a lot of complications.
Business Relief is not specifically targeted at the AIM market. It is targeted at unlisted investments in general – the AIM market just happens to be one platform in the junior markets for trading these shares - there are other platforms that companies can switch to and perhaps retain the relief if AIM is targeted.
The junior markets are an important part of the financial ecosystem, allowing companies to raise capital without the full cost of a stock market listing. Removing the tax incentive to invest in these stocks might have implications for Britain’s place in attracting entrepreneurial business to the UK.
HMRC would need to compare this relief with the reliefs available for other sorts of investment and justify singling out this particular one.
There are genuine family / founder managed businesses on AIM that would be badly affected by such a change. That’s not supposed to be the Tories style!
The relief is also supposed to encourage investor risk taking in young companies that can either fail or come good. Removing the relief specifically targets those companies that have been successful!
Of course, HMRC could just make obtaining BR more complicated by restricting its accessibility but usually that just drives people to other tax reduction schemes, so I doubt HMRC see it as a definite tax grab. But in any case, it’s called the Office for Tax Simplification.
Investors in AIM stocks tend to be long-term – exactly the sort of investor companies need.
Will there be a stampede for the exit?
Clearly it is possible that investors holding AIM stocks purely for IHT relief might seek to sell and reinvest in other tax efficient schemes, so it seems likely that share prices would come under pressure in the short term. However, many of these companies (particularly the ones we hold) have very sound investment cases regardless of their tax position. Longer term holders may also have significant taxable gains to consider, so selling straight off may not make much sense. I don’t think that investors should feel the need to sell now and avoid the rush. Finally, all tax efficient schemes are at risk of change by HMRC, all the time, so pre-emptively changing to other schemes risks placing the client in a worse situation.
What shall I do now?
Clearly there is a risk that HMRC will restrict access to BR but as I have shown, there are some serious hurdles that HMRC has to consider. On that basis it seems wise to wait and see. Bear in mind that AIM portfolios do not involve complicated and expensive legal structures. They are not expensive to set up and they are not difficult to unwind. If you are concerned about being ‘gated’ into a portfolio - avoid the largest managers who will suffer most from a liquidity crunch. Smaller managers will have a shorter queue at the exit if it is needed. I have written before about liquidity issues so please get in touch if you would like to read this.
If you would like to know more about our IHT service, please contact Chris Redman at 0203 750 1810.
Chris Redman, Chartered FCSI
Investment Director and Head of IHT Portfolio Solutions