BR Guide Second Edition

BR INVESTMENT OPTIONS 26 LISA MEAD PRIVATE CLIENT TAX PARTNER WITH CROWE UK LLP Tax Considerations Aside from the normal investment risk of holding shares in an unquoted company, there are a number of tax considerations of which to be aware when considering if BR for IHT purposes will be available for AIM shares. Some of those that may not always be fully considered are: • The company could take an action that means it no longer qualifies for BR. For example whilst shares listed on AIM do qualify for BR, they must not also be listed on any recognised stock exchange. This point is often overlooked and is particularly relevant where the company is a non-UK company or has significant overseas interests and seeks to list elsewhere as it grows. In addition, established companies often have large cash balances and have no immediate business plan for that cash so choose instead to invest it, rather than use it for their existing trade. This could prejudice the availability of BR. Often actions taken by a company will not become apparent until a claim for BR is made to HMRC, by which time it is too late for the investor to take any action. • The application of BR to AIM quoted shares is based on current legislation. If, in future, the Government was to abolish or restrict BR, not only could the IHT relief be lost, but the investment could be devalued as the resale market would be limited, making it difficult to realise and reinvest. Although rare, it is not unknown for changes in tax law to have retrospective effect. • Taking a decision to invest in BR qualifying assets may mean that proceeds from other assets need to be realised. There could be an immediate CGT cost on the disposal of other assets which needs to be ascertained and balanced against the potential future IHT savings. • On death many individuals who are married or in civil partnerships leave assets to their spouse or partner in order to utilise the spouse exemption and completely avoid IHT. BR qualifying assets do not need to be left to a spouse; they can be left to other family members and friends with no IHT due and it can be helpful if a trust is used for this purpose. This means that the individual does not have to rely on the spouse to pass on the assets at a later date. However, we frequently see that individuals do not update their Wills to reflect a change in the nature of their investments. It is therefore vitally important that the benefits of BR are maximised by ensuring that the Will is reviewed, to avoid the Will preventing the benefits of BR applying. In summary Whilst BR is a very valuable relief when planning to reduce IHT liabilities, personal tax advice is required to ensure that the maximum tax relief is available on an investment in AIM shares. Those who are not advised, or who later discover the company has taken action that they did not anticipate, may find their estate depleted significantly by a large tax bill and could additionally be left holding an illiquid investment that may have lost value. BUSINESS RELIEF IN THE CONTEXT OF AIM SHARES Thought Leadership Considerations for Business Owners EXCESS CASH/INVESTMENTS: CORPORATE BR SOLUTIONS TO IMPROVE TRADING STATUS The original intention of BR was to protect small businesses from IHT and ensure that they could be handed on to the next generation intact. Of course, this is still the case today and for many business owners their business offers the perfect shelter from IHT. Most small businesses are outside of the charge to IHT because they qualify in full for BR, subject to the qualifying criteria and the cash and assets held within the business. Nevertheless, excess funds which are not held for an identifiable future use in the business could be treated as excepted assets and excluded from the relief. However, there is an option to invest those assets into BR-qualifying shares. BR also provides an exit solution for business owners that can preserve the IHT relief of their company via Replacement Property Relief. Corporate BR investments should be good, new, incremental business for advisers, as they don’t cannibalise anything from existing business. And if advisers are likely to continue to advise the client’s beneficiaries, they have a vested interest in preserving as much of the estate as possible. BR qualifying investment solutions in this scenario have been around for some time; some corporate BR solutions have been in place for over 20 years. 3.2 27 BR INVESTMENT OPTIONS CORPORATE BR TRADING STRUCTURES Subsidiaries and Partnerships Business property that qualifies for 100% IHT relief includes shares in an unlisted company and a sole trader business or share in a partnership. Some managers offer services that address the issue of excess non-trading assets within a business by setting up a subsidiary company that invests surplus cash into BR qualifying investments. This means that BR and, in some cases, entrepreneurs’ reliefs can be reinstated but the business can still access these funds should it need to (subject to the liquidity of the underlying investments). Certain providers set up a wholly owned subsidiary for the corporate client (e.g. TIME:CTC) and the subsidiary then becomes a partner in a number of underlying LLPs. Other providers operate a structure whereby the corporate client directly becomes a partner in a single LLP. Nevertheless, if any subsidiary is not considered to be mainly trading, it would be treated in much the same way as an excepted asset. The BR would be restricted according to the market value of that investment subsidiary. Care does need to be taken where a partnership/LLP owns an interest in a trading subsidiary as, unless the partnership/LLP itself carries on a trade, no BR will be available. This is because the holding of the shares in the trading subsidiary is by itself an investment activity which does not qualify for the relief.