New data from HM Revenue & Customs has shown that just 68 estates were able to shelter £1.8 billion from inheritance tax using business relief. This has resulted in calls for Business Relief to be removed from AIM shares.
But wealth managers and investors in UK stocks think this would be hugely damaging for smaller companies in the UK and jeopardise attempts to rejuvenate the UK stock market.
AIM stocks IHT relief: how it works
Most AIM stocks are exempt from inheritance tax (IHT) if they’ve been held for more than two years, and depending on individual circumstances it may be possible for AIM shareholders to qualify for the income tax and CGT reliefs when held via an Enterprise Investment Scheme, or through CGT Entrepreneurs Relief.
In some respects, investors are being compensated for the higher risks they are taking on by investing in London-listed AIM stocks – e.g. AIM stocks don’t require a trading record, and there is no minimum market capitalisation requirement.
While the AIM tax break was introduced in 1976, it was originally designed to help prevent private businesses from being broken up on the death of the founder. Share portfolios of AIM stocks have now become an important tool in inheritance tax planning.
According to a Freedom of Information application, the 68 estates in question in the tax year 2020-21 represented just 2% of claimants, but 57% of the assets which benefited from the tax break. The Institute of Fiscal Studies has argued that AIM estate tax reflief should be capped at £500,000 per person. This would generate an additional £1.1bn in tax revenue. However, this ignores the fact that wealthier investors currently using AIM for tax purposes would simply sell their AIM shares and seek other UK tax loopholes.
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Tax relief abolition “not the answer”
“It’s unsurprising that those who benefit most from inheritance tax reliefs are those few estates with the very largest potential tax bills,” said Nicholas Hyett, Investment Manager at The Wealth Club. “Politicians can argue about the desirability of that, but one thing that should be crystal clear is that abolishing business relief on AIM stocks is not the answer.”
For starters, the sudden removal of IHT reliefs would cause severe disruption to AIM, as investors who have opted to invest in these higher risk stocks pull their money from the market, potentially causing a substantial fall in share prices.
Longer term it would mean lower valuations for AIM quoted stocks, making it more expensive for UK companies to raise funding and less likely they will list in the first place. The UK already has a problem with losing its best and most ambitious businesses overseas – this would only make things worse.
Reliefs bringing critical liquidity to AIM market
Some critics have suggested that since liquidity in the AIM market has improved dramatically over the last few decades, the reliefs are no longer necessary. That misses the point that liquidity has improved precisely because these reliefs exist.
“Pulling the reliefs would likely leave the market with less liquidity than a sieve in the Sahara,” said Hyett.
With both major parties making commitments to support small businesses and rejuvenate the flagging UK stock market, torpedoing the UK’s junior market would be an act of economic self-sabotage. But at the same time the entire UK tax landscape is likely to be reviewed for potential new revenue sources by an incoming Labour government.
With the Conservative party still trailing Labour in the polls, and only a month left until the election, many in the City of London remain braced for tax hikes of some kind come the autumn.
