Office of Tax Simplification Inheritance Tax Review – second report: what does it really mean for AIM?
The Office of Tax Simplification (‘OTS’) published its long-awaited review on reforming Inheritance Tax. A first report released in November 2018 dealt with the administration of estates while the latest report focuses on how Inheritance Tax could be made “easier to understand and more intuitive and simpler to operate”.
The stand-out headlines in the latest report were recommendations to reduce the seven year rule for gifting assets to five years and to increase the lifetime gift allowance from the current £3,000 to something more meaningful.
The press has also been keen to jump on a mention in the report of Business Property Relief (‘BPR’) and whether the treatment of AIM shares is within the policy intent of BPR.
Paragraph 5.19 of the report states:
…in relation to third party investors in AIM traded shares, BPR is not necessary to prevent the business from being broken up or sold in order to fund the payment of Inheritance Tax. This raises a question about whether it is within the policy intent of BPR to extend the relief to such shares, in particular where they are no longer held by the family or individuals originally owning the business.
Firstly, it should be emphasised that this was only an ‘observation’ and no further reference was made to AIM in the report in the conclusions or recommendations. However, in our opinion the report makes a reasonable observation regarding AIM.
BPR has never been wholly relevant to AIM in terms of preventing a business from being broken up or sold in order to fund the payment of Inheritance Tax. The relief in respect of smaller listed growth companies, is surely in place to attract third party investment and there are indications that the Treasury has always considered it thus. This is backed up by paragraph 5.18 of the report which states:
The OTS notes that the government’s response to the Patient Capital Review consultation published in November 2017 stated the government’s commitment to protecting the important role that BPR plays in supporting family owned businesses and growth investment in AIM and other growth markets. In correspondence and meetings, the OTS has heard evidence of its importance in meeting that objective.
To reiterate, contrary to what has been suggested by some of the more sensationalist headlines in the mainstream press, the OTS report has not recommended the removal of BPR on AIM.
However, the OTS report has recommended that estates should not benefit from Capital Gains Tax dying with the deceased if the same assets in the estate are also benefitting from an IHT relief or exemption. In this regard Recommendation 5 on page 44 states:
Where a relief or exemption from Inheritance Tax applies, the government should consider removing the capital gains uplift and instead provide that the recipient is treated as acquiring the assets at the historic base cost of the person who has died.
The Treasury has said it will respond to the report in due course and consider its recommendations.
Last year’s Patient Capital Review highlighted a huge gap in funding in the UK for smaller growth companies and the removal of BPR on AIM will only exacerbate this, therefore we remain cautiously optimistic that radical changes are unlikely.
I think it’s worth reflecting that AIM as a viable Inheritance Tax planning option would not exist at all if the investment credentials didn’t stack-up in the first place.
Our AIM for Inheritance Tax portfolios have materially outperformed leading stock market indices for many years due to the compelling growth characteristics of the companies in which we invest, which just so happen to be accompanied by an attractive tax benefit for UK shareholders.
Successful AIM companies like RWS Holdings, AB Dynamics and many others have not seen their share prices rise due to the weight of demand from those investing for IHT planning purposes, they have risen based on the performance of the underlying businesses.
The great benefit of AIM is that it is market where share registers are dominated by family, founders and senior management.
Studies from Credit Suisse, Boston Consulting Group and Bain & Company have highlighted how superior growth and returns have been a feature of family and insider-controlled companies.
The great risk with a tax change of the type feared is if it pushes executive founders to sell early and exit the business, thereby depriving it of a valuable asset. For example, both RWS Holdings and AB Dynamics have benefited from the ongoing involvement of founder shareholders; Andrew Brode, Exec Chairman of RWS, has not sold a share since the business listed on AIM in 2003.
You can find out more about our high performing AIM portfolio service from the link here