BR report 2018

16 17 POLITICAL LANDSCAPE A POSITIVE ENDORSEMENT FOR BR BR was left completely unscathed in Philip Hammond’s 2017 Autumn budget, which was strongly encouraging for the continued legitimacy of the tax efficient scheme. HM Treasury’s comment in the consultation response to the Patient Capital Review (PCR) provided a positive endorsement for BR: “BR plays a valuable role in preventing the breakup of otherwise viable businesses purely in order to meet IHT liabilities. BR was also extended in the 1990s to all levels of shareholdings and shares quoted on growth markets. These extensions have supported investment in growth markets such as AIM.” “The government will keep BR under review, and is committed to protecting the important role that this tax relief plays in supporting family-owned businesses, and growth investment in AIM and other growth markets.” 9 This firmly secures BR’s legitimacy, and this can only be seen as a positive measure. The relief was intentionally expanded beyond family businesses more than 20 years ago. The term ‘family business’ now applies to two thirds of UK firms generating a quarter of UK GDP, many of which are the very companies the government is looking to target for growth and patient capital investment. 10 They are “less driven by short-term financial results and are prepared to sacrifice short-term gains for the achievement of longer-term goals.” Many of these businesses have been operating for hundreds of years, and their longevity and enduring success are testament to their innovative and long term outlook. ” 11 It’s encouraging to see government support for BR and its contribution to AIM and growth investments. However, the government is keeping BR under review, as with most tax reliefs, it makes sense for the government to review BR periodically to understand how it is working, and the value it is adding. OFFICE OF TAX SIMPLIFICATION REVIEW OF IHT In January 2018, Chancellor Philip Hammond wrote to the Office of Tax Simplification (OTS), requesting a review of IHT with a view to simplifying the current regime. Hammond wrote on 19 January: “I am writing to acknowledge the OTS’s recent interest in the IHT regime. IHT, and the system within which it operates, is particularly complex, and I would like to request that the OTS carry out a review of the IHT regime. I would be most interested to hear any proposals you may have for simplification, to ensure that the system is fit for purpose and makes the experience of those who interact with it as smooth as possible.” 12 SOURCE: INSTITUTE FOR FAMILY AND BUSINESS 420,000 FAMIILY SMEs WILL GO THROUGH AN OWNERSHIP TRANSFER IN THE NEXT FIVE YEARS 51% OF MID SIZED BUSINESSES ARE FAMILY FIRMS However, the review of IHT is unlikely to put BR under the spotlight. There are other elements of the current IHT structure that tend to cause complexity where the OTS could add real value. Ian Dyall, head of estate planning at Tilney, said: “If the Government really wants to simplify the regime, a quick win would be to scrap the residence nil rate band introduced by former chancellor, George Osborne, which is just too complex for people to really get to grips with. Instead, they might apply a higher standard nil rate band – of up to £400k per person from April 2020, rather than the £1m per couple that would be available to some couples from 2020 under the existing rules – provided they don’t fall foul of copious qualifying rules – which would be fairer for everyone and much simpler.” 13 Hammond’s letter also raises the issue of whether the current IHT system “causes any distortions to taxpayers’ decisions surrounding transfers, investments and other transactions”. Whether gifts, trust, insurance or investments that qualify for BR will be seen as a distortion remains to be seen. The OTS has also published a paper, Business Lifecycle Report: April 2018. The paper is an initial review focusing on businesses owned by individuals and families, and examining the tax issues and reliefs that impact at various points in the business life cycle, including when succession is under consideration. BR is included in the review and, again, the simplicity of administration is the focus. HOW THE OTS VIEWS IHT In February 2018, the OTS published a letter 14 setting out the scope of its IHT review. This was ahead of its call for evidence in the early months of 2018. The OTS aims to publish a report in Autumn 2018 with “specific simplification recommendations for the government to consider”, which are likely to be fed into the Autumn budget. The OTS has previously brought IHT into focus. In March 2011 it published a review of tax reliefs. 15 The OTS noted the contents of the Mirrlees Review, 16 published in 2010, which said IHT was “…a somewhat half-hearted tax, with many loopholes and opportunities for avoidance through careful organisation of affairs”. The OTS concluded that: “On the basis of the low number of estates caught by IHT and the useful, but relatively low, revenues (after reliefs) that it raises, we consider a more appropriate approach may be to review the whole of IHT rather than to consider individual IHT reliefs. Such a review may also encompass a review of capital gains tax and we envisage this as a longer-term project.” In 2015, the OTS published a Complexity Index 17 to compare the relative complexity of legislation and its overall impact. Out of 107 tax areas reviewed, IHT ranked third in terms of underlying complexity (behind two aspects of CGT). “BR plays a key role in encouraging long-term investment into both unlisted and AIM listed companies. It provides a very stable source of capital that enables companies to fulfil their growth potential.” — JESSICA FRANKS, BUSINESS LINE MANAGER, OCTOPUS INVESTMENTS The nature of BR related funding should not be underestimated from a patient capital perspective: although BR assets only have to be held for two years to qualify for IHT mitigation, the assets still have to be held until the death of the investor. As a result, BR investors have little incentive to sell their shares, making them a vital cornerstone investor and strong corporate supporter through uncertain economic times. This means that, in reality, BR is a much longer term proposition, with years of patient investment being funnelled into the UK’s unlisted businesses. Perhaps just as importantly, according to HMRC’s ‘Research into the influence of IHT reliefs and exemptions’, 18 published late in 2017, the majority of people are using BR as it was supposed to be used. The research focused on BR and agricultural property relief, looking at whether the allowances were being misused. So, in light of the government’s vow to protect the role of BR, the very substantial amounts poured into UK PLC (estimated at £4bn in the PCR), and volume of family firms safeguarded by BR, BR managers expect older investors to be a valuable source of patient capital for years to come. BR AS A SOURCE OF PATIENT CAPITAL