It is widely expected changes to inheritance tax are in the offing, potentially in next month’s Budget, with one fund manager commenting that any changes to the IHT exemption around AIM shares would be disastrous.
Inheritance tax (IHT) reforms have been mooted for some time, but the move now seems to be gathering pace, following two separate reports on how the system could be reformed.
Last year the Office for Tax Simplification (OTS) completed a two-part review into IHT, ordered by former chancellor Phillip Hammond in January 2018.
Various recommendations were made, including implementing a fully integrated digital system for IHT and simplifying gifting allowances. The OTS also called for a reduction in the seven-year rule to five years. This rule relates to the number of years that a person giving assets away needs to survive to avoid the recipient having to pay IHT.
More recently, at the end of January, a cross-party group of MPs called for a radical shake-up of IHT, cutting it from 40% to 10% for estates below £2 million. Those above this figure would pay 20%.
In its report, the All-Party Parliamentary Group (APPG) for Inheritance and Intergenerational Fairness suggested axing the seven-year rule in favour of a 10% tax on all lifetime gifts above £30,000 each year.
Alarmingly, for investors in the Alternative Investment Market (AIM) – particularly those with AIM portfolios invested specifically in shares eligible for an IHT tax sweetener if held for two years (not all AIM shares qualify) – the APPG’s “flat-rate gift tax” proposal states there would be “no reliefs” for AIM shares under its proposed regime.
The OTS adopted a similar stance, describing business property tax relief (which certain AIM shares benefit from) as “not necessary”. In addition, the American Assets Trust (NYSE:AAT) has also made calls for the exemption to be axed.
If these recommendations ever saw the light of day it would spell bad news for the AIM market as a whole, notes Paul Jourdan, co-manager of the TB Amati UK Smaller Companies fund. Just under half of the fund’s portfolio is held in AIM stocks, while Jourdan also co-manages the Amati AIM VCT (LSE:AMAT).
“If the IHT exemption was removed it would put pressure on AIM, certainly over the short term. It would be a recipe for mayhem if it was not done in an orderly way and instead everyone had to sell out all at once.”
Jourdan adds he hopes the government does the sensible thing and retains the current rules, but concedes:
“The honest answer is I don’t know whether the tax break will remain indefinitely.”
“One day it may well happen, and if it does I would hope the AIM market is now a big and deep enough market to recover from that.”
On the whole, though, the expectation is that the tax break will not be tinkered with. Paul Latham, head of tax products at Octopus Investments, points out that despite the OTS’s criticism of business property relief, it does not recommend any changes.
“The government intentionally extended business property tax relief to cover minority and passive holdings more than 20 years ago, with a view to supporting UK growth companies. It has been clear on numerous occasions that it still sees business property tax relief as playing an important role in supporting growth investment in AIM.”
Alex Davies, founder and chief executive of Wealth Club, a tax-efficient investment service that facilitates Venture Capital Trust (VCT) and Enterprise Investment Scheme (EIS) applications, agrees that it is unlikely to happen.
He points out it would mark a dramatic sea-change in government policy – given that various measures have been introduced to support the growth of entrepreneurial businesses. These include making AIM shares eligible for inclusion in ISAs and the abolition of stamp duty on AIM share, both in 2013.
“It would be nonsensical if the increasing amounts of money going into growth companies and in turn boosting productivity in the economy were deterred. These businesses need the capital and are essential in getting the economy motoring.”
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