On 5 July 2019, the Office of Tax Simplification (OTS) published its second and final report from its inheritance tax review. In particular, the report looked at Business Relief (BR) in some depth, including where it applies to AIM share.

BR was intended to remove the need for the sale or break up of family businesses to finance IHT payments. While acknowledging this, the OTS said: “However, in particular in relation to third party investors in AIM traded shares, BR 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 BR to extend the relief to such shares, in particular where they are no longer held by the family or individuals originally owning the business.” 

Despite this anomaly, there’s no specific recommendation on this topic and the OTS went on to highlight the fact that the government has stated its commitment to protecting the “important role that BR 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.”

The report also recommended that, for simplification, the BR trading test – whereby more than 50% of a company’s trading activity must be in BR-qualifying trades – could be aligned with the tests for gift holdover relief and entrepreneurs’ relief. This sees an 80:20 split of trading versus investment. Such a move would take away some of the versatility currently allowed to BR qualifying companies in terms of the activities they can trade in and the diversification they can bring to their business models. While it’s not unusual for Business Relief trading companies to be 100% dedicated to one qualifying trade, eroding these factors for the sake of administrative consistency could present an unnecessary threat to the methods available to small business to remain agile while also benefiting from BR’s original intentions. 

Some of the OTS’ recommendations could open up more structures to holding AIM shares in a BR compliant manner. It also requested clarification on when BR qualifying assets need to be formally valued. Such valuations are generally much easier and cheaper for AIM based BR investments than private shares as AIM shares have real time valuations freely available.

This piece has been published as part of the Alternative Investment Market Report 2019. For the full report click here