Long ReadApr 14 2022

How shareholders can benefit from 100% inheritance tax BPR 

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How shareholders can benefit from 100% inheritance tax BPR 
HMRC headquarters in Whitehall, London. (Credit: Fotoware)

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. 

This will certainly give some additional comfort, but there are no guarantees. In particular, remember that the shares need to continue to qualify so that, at the point of death when they fall into your estate, they meet the two-year condition referred to above.

There is no official list from HM Revenue & Customs that you can refer to showing which Aim shares qualify and which do not and even if there were, unlikely as it might seem in a particular case, a last minute change in what a company does could scupper all of that long-term planning. For a business already flirting with the 51 per cent ‘mainly’ boundary, even a relatively minor change could be fatal.  

In practice, it will be up to an estate’s executors to make an assessment and make the relevant claim for relief when they are dealing with the estate and, if challenged, debate the matter with HMRC. 

And is BPR itself at risk? For the reasons set out above, the extension of BPR to Aim-listed companies seems like one of those things that might just be said to be too good to be true and, even though it has been around for quite some time, something of an anomaly.

How likely is it BPR relief on Aim shares will be removed in the future?

Focus on the future of BPR for AIM shares has been heightened over the past few years by a couple of public reviews.  

The government responded to the November 2017 patient capital review consultation by saying that BPR plays an important role, both in supporting family-owned businesses and investment in growth businesses on Aim.  

Then in July 2019 the Office for Tax Simplification made a number of comments on the subject. While certainly not going anywhere near as far as recommending that Aim shares should not attract BPR, the OTS did point out that in the case of Aim shareholdings, BPR is not necessary to prevent businesses from being broken up.  

While acknowledging the argument put to it that BPR helps support the AIM market, the report sub-heading in the OTS’s report poses the (perhaps not entirely rhetorical) question: “Is the treatment of Aim shares within the policy intent of BPR?”, and includes the comment: “This raises a question about whether it is within the policy intent of BPR to extend the relief to such shares, in particular where they are no longer held by the family or individuals originally owning the business.”

The other specific issue addressed by the OTS is whether the 51 per cent 'mainly' test is itself too generous.  

There are a number of other points in the tax rules where an 80 per cent test is applied and it would be very easy for this change to be made, at the risk of disqualifying some Aim companies that currently qualify, in the name of consistency.  

At this point all that can really be said is that the OTS has left the question over Aim shares hanging and the question is now back with the politicians.  

We have recently had a spring statement where the chancellor was keen to talk up his tax-cutting instincts. But in a situation where, by definition, it is necessary to plan over a period of time – in the case of BPR at least two years – all of this is hardly reassuring.  

Mike Hodges is a tax partner and head of the private wealth practice group at Saffery Champness