John Hughman replies: If I had a pound for every time I’d been asked if the IC could provide a definitive answer as to whether an Aim-traded share qualifies for IHT relief I would probably have to start worrying more about obtaining this relief myself. The short answer is that we do not have such a list, largely because the HMRC itself does not make one public.
You are indeed absolutely correct that not all Aim shares will qualify for what is more accurately known as business property relief (BPR), even if held for the requisite two-year period. In an article we published two years ago (‘Build an IHT-exempt share portfolio’), we revealed that of the 1,087 companies listed on Aim at the end of January 2014, just two-thirds qualified. In many cases the reasons for non-qualification were clear – those with dual trading on a recognised overseas exchange, and companies whose principal activities are excluded from the relief, notably investment companies. However, in the case of a significant number of shares it proved harder to categorically determine whether they qualified or not – resources companies, for example, would qualify on the basis of their principal business activity, but are often structured as investment companies. The HMRC defines a company that does not qualify as one that:
■ Mainly deals with securities, stocks or shares, land or buildings, or in making or holding investments.
■ Is a not-for-profit organisation.
■ Is being sold, unless the sale is to a company that will carry on the business and the estate will be paid mainly in shares of that company.
■ Is being wound up, unless this is part of a process to allow the business of the company to carry on.
Nevertheless, interpretation of these guidelines still obviously presents a potential minefield for those looking to build an IHT-exempt portfolio of Aim shares – the main risk of course being that you include shares that do not qualify and your inheritors end up with a large and unexpected tax bill. This is why many looking to exploit this tax break use portfolio services rather than trying to build their own – among the growing number of providers are Charles Stanley, Hargreave Hale and Fundamental Asset Management, who wrote the previously mentioned article.
If you are still intent on cutting out these middle men, the first thing to do is familiarise yourself with all of the HMRC guidelines (www.gov.uk/business-relief-inheritance-tax/overview). After that, a thorough examination of the report and accounts and the status of the company’s stock market listing is the only way to confirm qualifying status. If you want to outsource this potentially arduous research there is another option: Investors Champion has done this research and for a small fee will check the BPR status of any Aim shares you choose (www.investorschampion.com/research/all-companies/designation/aim-for-iht-planning).
Again a word of warning. The BPR status of a share is not set in stone. If the nature of a company’s principal activities changes, or it finds itself on the end of a takeover offer, then the shares’ qualifying status might lapse, which is why even the most ardent DIY investors often lean towards outsourcing the problem to IHT portfolio providers. It’s presumably also why HMRC is not hugely keen on investing the effort into compiling its own regularly updated Aim BPR list, and instead only confirms an investment’s qualification for relief upon death.
One final point. It’s often said that you should not let the tax tail wag the investment dog, and buying Aim shares to avoid IHT is no exception. Once you’ve established the qualifying status, the next step is to make sure the investment itself stands up to scrutiny. After all, you do not want any relief from IHT to be overwhelmed by a thumping capital loss on a poorly chosen investment. Thankfully, there are enough good shares on Aim to avoid this outcome, and in fact the performance of many of the managed IHT portfolios has been extremely strong in recent years.
Send your letters and questions to Investors Chronicle, Number One Southwark Bridge, London SE1 9HL or email the editor at john.hughman@ft.com
