The Labour government is expected to make significant changes to inheritance tax in this week’s Budget. One area within IHT that some commentators are predicting will change is business relief, which could impact investors in Aim shares.
Current position – treatment of Aim-listed shares
IHT is currently charged at 40 per cent on assets within a deceased estate at the time of death. However, certain assets qualify for BR, which can offer relief from IHT at either 100 per cent or 50 per cent.
Shares in unlisted trading companies can qualify for relief at up to 100 per cent.
For shares to be considered unlisted, they must not be listed (or 'quoted') on the market of a designated stock exchange that meets the HMRC definition of ‘listed’, such as the main market of the London Stock Exchange, ie:
- The shares and investments are regularly bought and sold on the exchange, by both private investors and large institutions, such as pension companies.
- The shares are easily marketable, being open to all, and have a readily ascertainable price.
- The highest and lowest prices of the day are published the following working day, notably in the Financial Times.
Shares on the Aim (and NEX) markets are not considered listed and therefore benefit from IHT relief.
But just because a share is listed on Aim, that doesn’t mean it is automatically unlisted.
The definition of listed covers both UK and non-UK exchanges (HMRC maintains a list of stock exchanges that meet this definition) so Aim-listed shares that are also listed on another market could be defined as ‘listed’ for IHT purposes.
Additionally, the share must meet the other business relief conditions, namely:
- They must have been held for two years.
- The underlying activities of the company must be considered trading. This excludes businesses that trade in securities, land, or buildings or are involved in investment activities.
If the shares meet these conditions, then they would qualify for business relief at 100 per cent and there would be a tax-free uplift to the market value of the share at the date of death of capital gains tax.
In practice that means that, at present, qualifying Aim-listed shares can be passed on to the next generation without paying CGT or IHT.
Hence Aim-listed shares have long been popular a choice for investors, and numerous investment managers have pushed IHT friendly portfolios.
What might change?
IHT is ripe for change and the chancellor may also announce:
1. Capping business property relief.
At present the amount of business relief that can be claimed is uncapped, so any value of property can qualify for relief.
The government may be considering capping the amount of property that can qualify for relief, so that business relief would only be available on property up to, say, £500,000 in value.
2. Removing the CGT free uplift.
The relief from IHT and uplift in the base cost of the share to the value at the date of death has been called a ‘double dip’.
It is possible that the chancellor may remove the CGT uplift for property that qualifies for business relief. If that happens, the beneficiary would receive the shares at their original base cost, and any gain on disposal would be subject to CGT.
Following the Budget, we expect the rate of CGT to be increased from 20 per cent to up to 45 per cent, which would be more than the current rate of IHT.
Excluding shares listed on Aim from the definition of business property or restricting the rate of relief.
The government may change the definition of listed to include shares listed on Aim (or NEX).
