Inheritance Tax: The Exposure of AIM to Business Property Relief

21st Oct '19 by Chris Brown

10 comments 2627 reads

Inheritance Tax is often called a voluntary tax, paid only by the wealthy who fail to plan properly. You won’t find many people that like the idea of paying 40% tax on their life savings, and with more individuals seeking professional financial advice in recent years,¹ it’s no wonder that certain tax planning strategies are proving very popular. There is one such strategy that may be creating a hidden risk within your portfolio, even if you’re wondering what the hell I’m on about.

What is Business Property Relief?

Business Property Relief (BPR) has been on the go since 1976. It was designed to allow small, family-owned businesses to be passed from one generation to the next, without the tax man getting in the way by charging Inheritance Tax.

From allowing the local butcher’s shop to be passed on within the family, the BPR exemption now applies to quite a wide definition of ‘unlisted shares’. This includes most companies traded on AIM. Behemoths such as Fevertree and Abcam now benefit from this very same tax break. And there’s a whole host of investment management firms taking advantage of that fact.

BPR’s Inheritance Tax Attractions

The flow of money into AIM Inheritance Tax (IHT) Portfolios has been considerable. This article from the FT cites the surge in popularity of these products as of two years ago. From my own experience, I know many IFAs used to classify AIM Portfolios in the ‘niche’ or ‘esoteric’ bucket, but have been increasingly comfortable recommending such portfolios for the past three or four years at least.

You need to hold the qualifying investment for two years before it becomes exempt from Inheritance Tax. Any cash balances would remain subject to Inheritance Tax, however individual stocks may be sold and relief will continue once the proceeds are reinvested.

There are other Inheritance Tax planning strategies, but most of these involve gifting and trusts, or simply covering the tax bill with expensive life insurance. An AIM portfolio has the advantage of retaining assets in the client’s own name. Being effective after two years is also a shorter timescale than the simplest gifting and trust solutions, which can take seven or even fourteen years to completely fall out of the taxable estate. AIM is now a fundamental element of Inheritance Tax planning.

Coming Under Fire

However, the…

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garbetklb

21st Oct '19

Hi Chris
V interesting article - and I agree about some share prices being supported by the BPR relief premium.
I think you're wrong about the 2 year holding period - I believe that if an eligible share is sold and replaced by another eligible share, the clock remains ticking from the initial investment.
And I'm not sure what you mean by cash being taxable?
I looked at a number of providers a few years ago and the "hidden" snag was the cost of sharedealing - and lack of information about portfolio churn. I very much doubt that IHT managers are desperate not to trade during the first 2 years........
Andy

Chris Brown

Thanks garbetklb, I've edited the post to clarify that reinvestment relief is available. I believe any cash balance would still fall within the estate.

Gromley

Chris,

This is an excellent piece. Thank you for writing it and sharing it. I hope that now you have made your "maiden speech" it won't take you another seven years for the next one! ;-)

It will take me a while to take it all in, so I may come back with more meaningful comments in due course.

In the meantime though; I think you have hit the nail on the head in highlighting that this tax break with "good intentions" has had unintended consequences in providing a broader loophole than was intended. A bit like "help to buy" for the housing market or in the other direction the pensions "Life Time Allowance".

The wheels of government move slowly, but I think that one should always assume that these unintended consequences will get shut down eventually. In fact I can foresee another mis-selling scandal for the IFAs and funds encouraging poor investments purely for current tax advantages.

Personally I assess my AIM investments through exactly the same lens as my main market stocks, but it clearly should be of concern that any attempt to rationalise tax policy could cause and AIM market crash.

I am glad that you raised the issue, such concerns have been in the back of my mind for sometime, but they should perhaps be a little more front and centre!

timarr

22nd Oct '19

That's a really fine article. The idea that a lot of AIM stocks are a crowded trade has been around a while but it's nice to see some flesh on the bones. I have to say I'm surprised by some of the stocks that aren't on the list - Ab Dynamics (LON:ABDP) , Fevertree Drinks (LON:FEVR) , Boohoo (LON:BOO) for instance. However, I suppose the larger stocks are more likely to have significant institutional holdings, which would swamp the BPR holdings?

Given that BPR on AIM stocks is an obvious unintended consequence it will probably end under some future administration - IHT is clearly in need of some sort of shake up. Given that, by its nature, IHT mitigation is (hopefully) a long term thing it's hard to see why people are using this way, as it's a lottery as to whether it'll still be in place when they die.

scrooge

An excellent contribution, especially offering some insight into the extent of BPR holdings. Where I think I part company with you, is in the estimate of the consequences of ending BPR. These IHT-avoidance schemes are professionally marketed as just one element of a portfolio. Remove BPR, and these investments have to be appraised on the basis of their financial merits. But, as you point out, the best of them have a good Stock Ranks and half the AIM 100 have higher market value than the smaller FTSE250 companies.

So, pull the money from AIM investments, and where does it go? It's not obvious. There could well be some flight to quality amongst the AIM stocks, to the benefit of the likes of... Renew Holdings (LON:RNWH) and RWS Holdings (LON:RWS), but until another IHT fad appears, the impact on good AIM shares seems likely to be small.

financekwalee

23rd Oct '19

This wasn't a scheme I was aware of before, but it's a really good insight to start thinking about how if there was a change in regulation, those who catch the tail-end of selling could see huge losses!

Thanks for the article!

Clive Elliot

28th Oct '19

Likewise if Sajid Javid were to remain Chancellor of a strong government, and he substantially reduced or eliminated IHT, then the advantage of holding such stocks could decline or disappear, and you are left with the disadvantage of some increase of commercial risk, and the dangers posed by the less rigorous accounting rules attached to AIM companies!

peterthegreat

17th Jun '20

I had a look at AIM IHT portfolios run by fund managers a year or so ago and found that they were nearly all beating the market by a large amount. This is because, as Chris Brown's table suggests, the steady flow of money being gathered by these managers was for the most part being invested in a relatively small selection of qualifying AIM shares, thereby pushing the prices up. Some of the fund managers running these shares charge a hefty fee yet it is relatively easy to run a DIY IHT portfolio, perhaps using this table to help select AIM shares that qualify for IHT. I agree that there is a risk that the relief could be withdrawn. Many people expected this was going to happen in 2018 or in 2019 when the Office for Tax Simplification was reviewing this matter; in fact I sold some of my IHT portfolio ahead of one of the budgets for this reason, only to buy it back again when it was apparent that the relief was continuing at least for another year. Surely any withdrawal of this relief would have to be phased over a number of years (hopefully at least 5) in order for the market prices of the favoured companies to adjust in an orderly fashion. One practical tip to anyone running their own IHT portfolio is to make sure you keep and retain clear documentary evidence of your dealing and make it clear to your executors which shares you are using for business relief as your executors (or the professionals they appoint) will need to prove to HMRC when you bought the shares and, in some cases, to trace which proceeds of shares were re-invested in other qualifying shares to revive the relief. If dividends were re-invested, this can create additional complications. Despite the complications, the relief is generous so it can be well worthwhile.

dmjram

18th Jun '20

Governments can and do scrap reliefs with short notice, especially when in need of cash like now!

Gordon Brown's scrapping of dividend tax credits being a good example.

lecrow

24th Nov '20

The need to hold for 2 years means generally the managers of these funds as well as individual shareholders were less likely to sell up. I did see one fund manager stating as much. When covid hit AIM went down with the rest, but afterwards there appeared to be a faster and steadier recovery to the 100/200/350. If, as I suspect, BPR was responsible for this, I did wonder is there something to be said for this incentive to not liquidise? In fact prehaps a less liquid market is an advantage?

Inheritance Tax: The Exposure of AIM to Business Property Relief

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Chris Brown

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