Inheritance tax review questions AIM IHT perk
Many people invest in certain types of AIM stocks for their inheritance tax (IHT) benefits, however an adviser to the UK Government has questioned whether the tax perk is still necessary.
Withdrawing the IHT benefit could prompt many investors, including a large number of wealth managers, to sell these AIM stocks. Should you worry or has the risk been overplayed?
At the moment, your estate won’t have to pay the 40% IHT charge upon your death for any investments in AIM stocks that qualify for business property relief (BPR), subject to certain conditions.
This tax perk has led to many investors, including several AIM IHT portfolio services, owning the same group of stocks and bidding up their price in the interim. Popular names include tonic water specialist Fevertree Drinks (FEVR:AIM) and flooring manufacturer James Halstead (JHD:AIM).
BPR legislation was introduced for family firms passed down through generations so that inheritance tax bills wouldn’t put a business into liquidation. It was extended to include some AIM stocks that meet certain criteria. A qualifying company must have a proper trading business such as a pub, a manufacturer or a retailer.
In a new report, The Office of Tax Simplification (OTS) last week said that BPR wasn’t necessary to prevent a business from being broken up or sold in order to fund the payment of inheritance tax.
It added: ‘This raises a question about whether it is within the policy intent of BPR to extend the relief to such shares.’
There have been some recent concerns that the Labour Party would ditch the tax break if it got back into power. The OTS’s remarks will certainly add fuel to this fire.
The tax perk has been a major revenue driver for asset managers which run IHT portfolio services. Among them is Octopus Investments whose head of tax products, Paul Latham, implies it is still business as usual.
He states the report doesn’t recommend any changes but one cannot help feel that the OTS’s remarks may have set the stage for the Treasury to undertake a proper review.
Chris Boxall, who runs the Investor’s Champion AIM IHT search tool, says 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.
He adds: ‘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.’
Investors should not ignore the risk of the tax break being withdrawn, despite suggestions that AIM-related BPR is here to stay.
It is also worth considering that a large number buying stocks for IHT reasons are older people for whom AIM-quoted investments may not be suitable, given how many of the companies are higher risk in nature.
Click here to read a longer article on other elements of the OTS’s review into the inheritance tax system.