Aim shares could lose inheritance tax break in rule shake-up

Gifting rules could also be overhauled and replaced with a single personal gift allowance under proposals by the Office for Tax Simplification.

The inheritance tax (IHT) exemption that applies to shares listed on the Alternative Investment Market (Aim) has been criticised by the Office for Tax Simplification (OTS), which has been carrying out a review of death duties. 

The OTS was ordered by chancellor Philip Hammond in January 2018 to come up with suggestions as to how the IHT system could be reformed. Last November, in the first of a two-part report, the OTS urged the government to implement a fully integrated digital system for IHT, including the ability to complete and submit a probate application.

In the second part of its review, published today (5 July), the OTS has proposed that all the different individual gifting rules, such as the annual gift exemption and wedding gifts, be overhauled. It recommends introducing a single personal gift allowance that allows an individual to give up to a fixed amount each year.

The OTS report also recommends reducing the “seven-year rule” to five years. This rule is in relation to the number of years that a person making an IHT gift needs to survive to avoid the recipient having to pay IHT.

But, as far as investors are concerned, a potential can of worms could be opened if the government acts on the OTS’ criticism of business property tax relief, which certain Aim-listed shares benefit from. In the report, the OTS questioned the role of the relief, which it described as “not necessary”.

The Association of Accounting Technicians (AAT) has also made calls for the exemption to be axed.

As the AAT puts it “the reason why business property tax relief was introduced in 1976 was to make sure successful family businesses did not have to pay large tax bills to retain control of the business”.

The OTS adds that “in relation to third-party investors in Aim traded shares, business property tax relief is not necessary to prevent the business from being broken up or sold in order to fund the payment of IHT.  This raises a question about whether it is within the policy intent of business property tax relief to extend the relief to such shares, in particular where they are no longer held by the family or individuals originally owning the business.”

Removing or reforming the Aim tax break would be a big blow for the market, and likely lead to a short-term correction. According to Investor’s Champion, which provides research on small quoted companies, has a service that screens for stocks qualifying for IHT relief and around one-third of all the money invested in Aim is via wealth managers for IHT planning

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