Ending inheritance tax relief on Aim shares ‘would hit growth’

Scrapping a tax relief on shares in Britain’s high-growth businesses would risk derailing the government’s mission to grow the economy, experts have warned.
Removing the inheritance tax exemption on equities listed on London’s junior stock market in the budget next month could curtail innovation and productivity, they say.
Since 1996 most shares in small and medium-sized companies listed on Aim, if held for more than two years before an individual’s death, are completely exempt from inheritance tax under the business property relief regime. Abolishing the relief could raise £1.1 billion for the Treasury, the Institute for Fiscal Studies, a think tank, has calculated.
The scheme is designed to stimulate investment in smaller British businesses that tend to struggle for funding during the start-up phase. There are specific Isas (individual savings accounts) dedicated to Aim investments. Companies behind well-known brands including Asos, Fever-Tree and Hotel Chocolat have been listed on Aim, otherwise known as the Alternative Investment Market.
However, the relief has been criticised for allowing wealthy individuals to minimise their inheritance tax bills by allocating a greater share of their estate to Aim-listed equities. While holding more Aim shares probably would lead to greater volatility in somebody’s share portfolio, doing so provides benefits, with some estimates indicating that up to a third of Aim shares are owned for tax purposes.
Speculation that the chancellor could scrap the inheritance tax relief has hit Aim-listed shares. Since Labour took office on July 5, the market has fallen by about 4 per cent, whereas the FTSE 100, the index of the biggest companies listed on the London Stock Exchange, has risen by roughly 1 per cent. The junior market has also been suffering from a dearth of flotations and delistings.
Nicholas Hyett, an investment manager at Wealth Club, an investment firm that offers Aim Isas, said scrapping the relief could lead to “lower valuations for Aim-quoted stocks, making it more expensive for UK companies to raise funding and less likely that they will list in the first place. The UK already has a problem with losing its best and most ambitious businesses overseas. This would only make things worse.”
Simon French, chief economist and head of research at Panmure Liberum, the investment bank, said: “The UK government would be undermining the growth prospects of these companies [by scrapping the relief] at the very time they launch their primary mission to deliver higher sustainable growth for the UK economy.”
Last week The Resolution Foundation, a left-leaning think tank, argued that the exemption should be reformed as it generated “distortionary” behaviour and provided “low value for money”. Dan Neidle, a tax expert and founder of the Tax Policy Associates think tank, has said that the relief was “quite hard to defend”.
Beyond the Aim exemption from inheritance tax, there are several tax reliefs targeted at channelling capital into smaller companies, including the enterprise investment scheme, which lower investors’ tax bills if they buy new shares in fast-growing firms.