BLOG: Short-Lived Relief?
Updated: Sep 4, 2019
by Oliver Juggins | 12th July 2019
Inheritance tax can be a touchy subject – it’s levied at what is (usually) an unhappy time, on assets that have already been taxed multiple times.It’s paid almost exclusively by the middle class, with the wealthy often skirting it altogether. The threshold above which it’s levied hasn’t moved with inflation for the last decade. Half of all estates must fill out pointless, bureaucratic forms despite only 5% of estates owing duties.Whilst painful for the bereaved, it provides less than 1% of the total annual tax raised by the Exchequer.The list goes on.
Couple this with a Conservative Government with a strong track record of making tax more complicated and less comprehensible, and it’s no surprise then that a recent report by the Office for Tax Simplification (the ‘OTS’) was anticipated with a mix of excitement and fear.
The report, released at the start of July, was tasked with simplifying the “technical and administrative” aspects of IHT, and taken as a whole would represent a significant shake-up of the tax.
This is actually the second half of a review process, the first being an overview of the administration issues that surround the tax, released in November 2018.The primary conclusion here was that too many estates that don’t owe duties still have to fill out cumbersome paperwork:
(Source: HMRC data, printed in July 2019 OTS paper)
The report suggested a number of interesting and potentially exciting changes; many more than we have time to discuss.The one I will focus on in this short blog piece is the discussion around business property relief (‘BPR’).I highlighted the primary conclusion above to re-iterate that despite negative coverage, the BPR discussion was only a very minor part of the report. Taking up little more than a single page in the 5th chapter.
However, what was written wasn’t encouraging.The very first paragraph in chapter 5, “Businesses and Farms” mentions AIM shares, and the second reads:
“It is generally understood that the main policy rationale for BPR and APRis to prevent the sale or break up of businesses or farms to finance Inheritance Tax payments following the death of the owner.”
Bill Dodwell, OTS tax director, said separately: “We think Aim is the only market in the world where investors can receive an inheritance tax benefit. Supporting a market in this way is a different policy objective from supporting passing a business down the generations.”
Not an auspicious sign for the AIM beneficiaries of this relief. This quote clearly expresses a view that AIM IHT relief is not only outwith the ‘spirit’ of the BPR (remember this was designed to help majority and founding-family holders), but should be considered as an entirely distinct policy.
Framed in these terms, as a distinct policy, it’s clear to see the potential problem here: how likely is it that any future government would consider supporting an IHT exemption for common shares in listed companies? Why AIM and not the main market?
The recommendation that follows from this observation is soft - that the government should consider whether treating indirect non-controlling equity holders the same way as family/founders is appropriate. Whilst this stops short of recommending any action be taken, it does rather open up the relief for attack.
It’s hard to say whether any changes will actually be implemented though, not least because various upcoming and potential changes in government could result in any number of priorities (and governments) changing.
For example, under a Labour government one could more easily imagine the removal of this relief as part of a broader move away from a favourable tax environment.Even the modern Conservative party might take a similar view.
Consideration has to be given to the status of the AIM market as an important enabler of SMEs, providing capital where significant investment might otherwise be absent.As the Treasury said in September 2018 (though without explicitly supporting BPR), "We are fully committed to supporting AIM, which saw £5bn of shares traded on it in August 2018, and has helped thousands of UK entrepreneurs to raise the capital they need to innovate and grow."
Since inception the AIM market has raised nearly £114bn and seen 3,861 new issues, and since BPR was applied to AIM shares in 2013, over £33bn has been raised. Of the 900 companies currently listed on AIM, 882 have a market cap below £1bn.AIM has been a huge advantage for small companies looking to make investments in the UK economy, as well as to investors.To jeopardise this for a minimal economic benefit (the elimination of ALL BPR and Agricultural reliefs would raise only an extra £1.2bn/year so removal of AIM relief alone would likely result in a vastly smaller number) would not be wise.
Ultimately, the strongest arguments for retaining the relief are pragmatic - it would raise minimal extra revenue, and it would significantly disrupt an industry that has already recently been hit with RDR and MiFID II.
Perhaps letting sleeping dogs lie represents the best policy here?