On the 5th of July, the Office for Tax Simplification ("OTS") published the second of two reports covering a review of Inheritance Tax ("IHT"). The first report, published in November 2018, was titled "Overview of the Tax, and Dealing with Administration"1 and addressed the practical complexities of IHT.
The second report has been widely anticipated, particularly with regard to the potential impact which it may have on the trades which would be considered qualifying for BPR. At over 100 pages, spanning twelve chapters and covering as many topics, the document is comprehensive. For those advising within this space, it would be instructive to undertake a full examination of the document. There are a handful of points that have received most of the attention and are illustrated below:
- The OTS does not agree with the suggestion to lower Business Property Relief (and Agricultural Property Relief), with a corresponding reduction in the rate of IHT
- Treasury is recommended to lower the seven year gifting rule to five years, and to remove taper relief
- There are a number of proposals to re-examine, and remove inconsistencies relating to interaction between Inheritance Tax and Capital Gains Tax
- It was concluded that as the Residence Nil Rate Band is still a relatively new feature, it is too early to evaluate its effectiveness
Aside from these key points, another area which has featured prominently within the press is whether the treatment of AIM shares is within the policy intent of BPR (or the "spirit" of BPR). Readers will be aware that murmurs about AIM listed shares as being eligible for BPR, have long been floating around the market. The second report addresses these issues head-on in the following comments, sourced from the report:
Item 5.19: "in relation to third party investors in AIM traded shares, BPR is not necessary to prevent the business from being broken up or sold in order to fund the payment of Inheritance Tax. This raises a question about whether it is within the policy intent of BPR to extend the relief to such shares, in particular where they are no longer held by the family or individuals originally owning the business"
There is no doubt that an adjustment (or indeed, removal) of the inheritance tax break afforded AIM listed shares could have an impact on AIM. However, the devil is in the detail, and these comments should be taken within the context of the overall report. In the item just above the aforementioned comment is the following:
Item 5.18 "The OTS notes that the government's response to the Patient Capital Review consultation published in November 2017 stated the government's commitment to protecting the important role that BPR plays in supporting family owned businesses and growth investment in AIM and other growth markets. In correspondence and meetings, the OTS has heard evidence of its importance in meeting that objective."
Clearly, the OTS has acknowledged the key findings from the Patient Capital Review; more specifically, the need to encourage investment into smaller, at-risk companies. It is also a generally accepted idea that AIM serves as a good source of scale-up capital for companies, which have "graduated" from the SEIS/EIS or VCT markets, but are still too small to list on the Main Market. Following the Patient Capital Review, it would appear unlikely that the Government would want to compromise this arrangement. Perhaps even more importantly, however there are no conclusions recommending the removal of AIM shares' eligibility. Rather, the comments above are just observations. Therefore, taken on balance, the risk to AIM shares losing BPR qualifying status is arguably less severe than many media outlets would suggest.
It is similarly worth pointing out that the review made no specific reference to any of the other commonly recognised BPR trades, such as renewable energy and lending activities. This is not to say that these are immune to future review, however absence of any commentary in this regard is notable. Overall therefore, efforts to simplify the complexities around IHT will be welcomed by many within the market, and it would appear that the significant focus of the latest review was intended to address just that.
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