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As most will be aware, the Chancellor Rishi Sunak has a tight fiscal tightrope to walk. He must attempt to fill the Treasury’s coffers without stifling economic growth.
So, what might he have up his sleeve when it comes to Budget 2021?
One thing to finally consider is something that I have mentioned a number of times over the years. That is the rather anomalous situation where a retail investor can invest a sum of cash in to Alternative Investment Market (“AIM”) listed shares in the knowledge that, after two years, those assets will fall outside of their estate for IHT purposes.
IHT Business Property Relief (“BPR”)
BPR 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 of relief depends on the relevant asset.
However, for the purposes of this article, where one holds shares in an unquoted trading company for two years then the relief is 100%.
Pretty good, eh?
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. A Company will be considered to be unquoted where:
Mrs Miggins’ IHT planning
In the absence of any other requirements, it is therefore possible for the retired Mrs Miggins to invest, say, £1m into a basket of AIM shares.
After two years (or less if one is investing as what is known as ‘replacement property’) then the potential IHT liability of £400k is completely removed from Mrs Miggins’ estate.
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 tax purposes.
What was the policy intention?
Do we really think it was the policy intention to provide for cases like Mrs Miggins above? Well, of course, one could say that the policy intention can only be determined from what the legislation sets out.
However, my view is that it is most likely that the intention was to make BPR 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.
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 new rules mean that these shareholdings are cast outside of the qualifying conditions?
My answer is simply no.
The difficulty is how does one make a distinction between AIM shareholdings that:
One might also be required to satisfy other conditions.
For example, a shareholder of an AIM company, in order to qualify for relief, might be required:
Of course, this assumes that my understanding of the policy intention is anywhere near correct. It is quite possible I am completely wrong on this.
However, the alternative possibility, 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.
How much does this relief cost?
I can find no figures that directly encapsulates the amount of relief given for shares that are quoted on the AIM market.
In total, it is anticipated that BPR, along with Agricultural Property Relief (APR) will cost the Exchequer just under £6bn over the next 5 years.
When compared to R&D relief, which costs over £4bn a year, it is not a huge amount. However, it could hardly be described as inconsequential.
Further, within that figure, there is no breakdown as to the amount of relief that applies to AIM related BPR claims and whether or not they apply to cases such as Mrs Miggins or genuine family businesses that have simply been listed on AIM.
Of course, the removal of relief for passive investors would also have an adverse impact on the AIM market.
As we see the Government is looking to raise additional revenue to pay for the pandemic, funding social care and the costs of decarbonising the economy of the future.
Tax rises are often unpopular, but tweaking reliefs for better off taxpayers might be more palatable for the masses. Particularly, when the relief being taken away doesn’t, objectively speaking, appear to make much sense.
As such, I wouldn’t be at all surprised if Mr Sunak looked at at such a ‘tweak’ to BPR as outlined.
Mrs Miggins had better watch this space…
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