Writing for Taxation magazine’s Readers’ Forum, BKL tax consultant Terry Jordan responds to a reader’s query about business property relief for inheritance tax on AIM shares.
‘A recent article in the finance pages of a national newspaper referred to the speculation on inheritance tax business property relief (IHT BPR) being withdrawn on alternative investment market (AIM) shares. The article also referred to a method of preserving the relief by transferring such shares into a trust after they have been held for two years. The suggestion was that this cements the relief.
Do Taxation readers consider that this procedure would be effective, and what other advantages and disadvantages can they identify?’ Query 19,589 – Billy.
Terry Jordan’s reply: The AIM company itself must apply for inheritance tax exemption
‘Some, but not all, shares in trading companies listed on the AIM benefit from 100% business property relief once they have been owned for the minimum period of two years. Relief will not be available if the shares are also listed on a recognised stock exchange anywhere in the world. On death, the relief is as good as an exemption, but in the context of a lifetime transfer the distinction is important because of the ‘retention’ rules in IHTA 1984, s 113A.
In simple terms, s 113A requires the recipients (the donees in the case of an outright gift and the trustees if the transfer is to a relevant property trust) to have retained the shares for seven years or until the earlier death of the transferor. The company does not have to remain trading in nature for the relief to be preserved.
As Billy has highlighted, the treatment of a potentially exempt transfer (PET) differs from an immediately chargeable transfer. In the latter, if on the death of the transferor within seven years the retention rules are not satisfied, it is only the additional tax that is charged and the value of the gift is not cumulated with the death estate (s 113A(2)). In that way, under the current rules, a transfer to trust locks in a measure of relief and may be preferable to a PET. An account of the immediately chargeable transfer may be required because the reporting threshold in the regulations is gross of business property relief.
A lifetime transfer will be a disposal for capital gains tax purposes and holdover relief will not be available if the trust is settlor-interested (settlor, spouse or civil partner and unmarried minor children are not excluded) – see TCGA 1992, s 169B (‘Gifts to settlor-interested settlements’).
The Office of Tax Simplification (OTS) and the all-party parliamentary group (APPG) both recommended a review of the relief for AIM shares. Before April 1996, it was necessary to have more than 25% of the voting rights to obtain the higher level of relief and the reintroduction of such a requirement would sound the death knell for inheritance tax AIM portfolios. Having said that, over the years AIM has been favoured in that the shares can be held in ISAs and there may be no stamp duty on the purchase of AIM shares.
A little-known fact is that the company itself needs to apply for the exemption and not all of them have.’
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