Business Relief (formerly known Business Property Relief) was introduced in 1976. The main aim of Business Relief, in policy terms, was to reduce the risk of inheritance tax (IHT) charges arising on the death of family business owners which then resulted in the break-up of a family business.
For shares in unquoted companies where the conditions for the relief are met – the main condition being a minimum two year ownership period – the shares will be free of IHT on the death of the shareholder. Business Relief is therefore a very valuable relief and one which in recent years has become an integral part of many individuals IHT planning strategies.
Of all of the IHT solutions now on offer to individual investors probably the most well-known is investing in AIM shares. AIM stands for Alternative Investment Market. According to the London Stock Exchange's website: "AIM is the most successful growth market in the world. Since its launch in 1995, over 3,600 companies from across the globe have chosen to join AIM. Powering the companies of tomorrow, AIM continues to help smaller and growing companies raise the capital they need for expansion."
So whilst AIM focuses on young, growing companies they are nonetheless listed on a stock market and hence are accessible to investors in a way in which unlisted companies in private ownership are not. As the article points out though, shares in AIM are counted as unquoted for the purpose of the inheritance tax legislation, hence why they are exempt from IHT once all of the Business Relief conditions are met.
As more and more money has been poured into AIM and other Business Relief qualifying investment in recent years the question of whether the relief should be restricted has become more prominent. Whilst the original policy makers almost certainly did not anticipate the legislation being utilised in this way, undoubtedly Business Relief (along with other similar tax reliefs available to those investing in start-up companies) has encouraged investment into small UK businesses. Arguably this has encouraged both entrepreneurship and growth in small businesses, with all of the benefits that this brings to the UK economy.
But as Judith MacKenzie points out, a lot of the money invested in AIM finds its way to the larger companies, many of which may not be considered young start-up companies to a lot of people. As well as Asos, other well-known companies listed on AIM include Majestic Wine and the fashion retailer Boohoo. There is a growing argument that investing in the larger companies on AIM does not bring with it the same benefits to small businesses and to the economy as a whole, and so why should those investing in the larger, less risky companies receive the same tax reliefs.
With this issue starting to gain press coverage and with the autumn budget on the horizon it could be that we see the Chancellor taking the opportunity to review the rules around Business Relief.
A fund manager has called for tax rules governing Aim shares to be reviewed, saying they were sometimes used in a "cynical" way not intended by policy makers. Judith MacKenzie, who runs the £89m Downing Strategic Micro Cap fund, said the rules should be changed to ensure the tax breaks do not apply to the shares of the very largest companies on Aim.