Among the attractions of investing in shares on Aim, the market for small and medium-sized growth companies, are the tax benefits some Aim shares can provide, notably the 100 per cent relief from inheritance tax business property relief.
But what exactly is this relief and what do investors need to know in order to benefit?
What is the rationale for providing a 100 per cent IHT exemption for certain businesses?
For shares held in a family business there is a logic to the generous 100 per cent BPR exemption from IHT. The argument goes that, on the death of the business owner, it could be very damaging to the business to levy tax at 40 per cent, which in some cases, if the only way to pay the tax is to borrow, could force the company to be sold to enable the family to meet the bill.
The concept of multi-generational family companies could then be under serious threat.
Bearing in mind that the conditions that apply to companies to allow them to qualify for BPR mean that, broadly, BPR only applies to trading companies, the collateral damage could include the loss of jobs. Much better, then, to keep the business intact, which BPR supports.
How does BPR apply to Aim investments?
The policy logic that applies to family companies is not as clear when it comes to shares listed on Aim. Nevertheless, provided they meet the same qualifying conditions, the fact that they are listed on Aim does not prevent them from qualifying for BPR in the same way as shares in any other unquoted family company.
The other key factor is that, unlike some other tax reliefs such as the Enterprise Investment Scheme, there is no requirement that you have to be the original subscriber for the shares when they are first issued. Existing shares acquired in the market equally qualify.
There is even a potential double attraction in that, since 2013, it has been possible to hold Aim shares in an Isa so that dividend income and gains when the shares are sold are also tax free.
A word of warning on the IHT side though: there is a two-year qualifying period in order for shares to qualify for BPR, so some planning ahead is needed.
What are the eligibility criteria and how can investors ensure they qualify for BPR?
It is not enough simply to say that the company’s shares are listed on Aim. There are a number of conditions that need to be met.
Broadly, companies that do not qualify for BPR are those whose business consists wholly or mainly of one of the following:
- Dealing in securities, stocks or shares;
- Dealing in land or buildings, or
- Making or holding of investments.
There is an important relaxation of the final condition, which does not apply if the company is wholly or mainly the holding company of qualifying companies.
This definition highlights one of the practical difficulties, which is identifying Aim companies whose shares qualify for BPR and are not caught by one of these exclusions.
‘Mainly’ means 51 per cent or more and is applied to various aspects of a company and its activities. While an investor will have access to publicly available information, including accounts and company announcements, it may not always be possible to be certain that the shares you are proposing to acquire meet the conditions. You may get comfort from using an adviser specialising in putting together qualifying Aim portfolios explicitly to tap into the benefits of BPR.