Ever since the inception of the Alternative Investment Market (Aim) in 1995, and for two decades before that, it has been possible for private investors to claim a tax break known as Business Property Relief (BPR) on some of their investments in small and fledgling companies.
The relief allows investors to pass certain types of Aim shares and unlisted investments, which have been held for at least two years, down to the next generation free of inheritance tax (IHT).
But the tax break, designed to prevent the break-up or sale of family businesses upon the death of their owner/founder, has been held up to the light by the Office of Tax Simplification (OTS) as part of its examination of IHT, and found to be flawed.
While recognising the purpose of the relief and the role it plays, the OTS couldn’t resist a few digs. Some people think, it says, that BPR and sister tax Agricultural Property Relief (APR) should be removed altogether. And while that suggestion was “beyond the scope” of its review, the OTS includes some data to “help inform the debate”: abolishing BPR and APR, it says, would fund a reduction in the main rate of IHT from 40 per cent to around 33.7 per cent.
Having planted that idea, the OTS wonders if the treatment of Aim shares is in fact “within the policy intent of BPR”, ie are investors getting a free tax perk never meant for them by riding on someone else’s coat-tails? Extending the relief to “third party investors… is not necessary to prevent businesses from being broken up or sold to fund the payment of IHT” it says. And the OTS flags up another thing – lucky Aim investors can also wrap their shares in an Isa, whereas Isa investors in main-market shares cannot avail of BPR.
So why didn’t the OTS actually recommend that BPR be restricted to family members? Well almost certainly because, in its own words, that would be beyond the scope of the review. It would be an alteration to IHT, not a simplification of it, plus rewriting the legislation to exclude third-party investors would add a whole new layer of complexity to IHT, quite the opposite of the simplicity being sought.
But for Aim investors the presentation of BPR as undeserved is disquieting. There are good reasons why successive governments have left BPR well alone. It protects small businesses; doesn’t cost much (around £655m a year); and crucially it provides an incentive to investors to support high-risk growth companies through funding and secondary trading, which keeps liquidity at healthy levels.
Investing in Aim shares is not an instant or easy way to profits. Pulling the rug from under investors now would not simply mean the withdrawal of a niche tax relief; it would hit investors’ portfolios hard with share price falls, increased illiquidity and potentially a reduction in listings.
If there is something wrong with the relief, it’s that it can be claimed on overseas companies which are not incorporated in the UK and have zero operations and employees here. Now that is wrong and as aspect that should be addressed.