Shares on the Alternative Investment Market (AIM) are often seen as offering an easy opportunity to pass on wealth to the next generation without incurring Inheritance Tax (IHT). In principle, an investor buys AIM shares which qualify for BPR, survives for more than two years, and then passes them on to their children by Will. However, the situation it not that simple and there are several potential pitfalls.
An AIM listing alone does not guarantee that shares will qualify for BPR. The following kinds of companies will not qualify:
– those wholly or mainly investing in shares;
– those wholly or mainly investing in real estate (i.e. earning rental income);
– those traded on a recognised stock exchange (e.g. abroad).
Even where the conditions for BPR are met at the time the investment is made, the relief can still be lost if either a company acquiring the one the taxpayer has invested in, or a subsidiary of the company invested in, meet the above conditions. Always get your broker or investment manager to confirm in writing that the shares you are buying qualify for BPR at the date you acquire them, if there is a take-over or as part of your annual investment review.
The shares must have been held by the transferor for a minimum continuous period of two years prior to the claim for relief being made. If shares in a company that have ceased to be ‘relevant business property’ are sold and replaced by shares which are ‘relevant business property’ the two-year clock must start again from the date the new shares were acquired.
HMRC does not publish a list of BPR-qualifying companies; entitlement to BPR is assessed retrospectively once a claim for relief is made. There are two points at which entitlement may be assessed: if the transferor dies within 7 years of making the transfer, (e.g. a lifetime transfer into a discretionary trust) where claw-back* becomes an issue, or otherwise on the death of the shareholder after at least 2 years. The shares need to qualify as ‘relevant business property’ at that point. If shares are placed into discretionary trust and the settlor survives 7 years there is no claw-back and no IHT on the death of any beneficiary.
If shares which were not relevant business property (i.e. did not qualify for BPR) when first acquired become ‘qualifying’ during the two years prior to death, they will be deemed ‘relevant business property’ at the date of death, as long as they were owned for the full two years.
The taxpayer must be UK-domiciled at death. It is quite hard to lose your UK-domiciled status. Even if you leave the UK with the intention of never returning, a full 3 tax years have to pass before your UK domicile lapses. But if you have been previously domiciled elsewhere this could be a problem. You would need to be sure that a UK domicile had been acquired before relying on this form of planning.
If a lifetime gift is made of ‘relevant business property’ and the transferor fails to survive seven years claw-back* could be applied to the relief.
Problems of volatility and illiquidity are much more likely with AIM shares than FTSE100 shares. If the investor wants to have access to the funds during his lifetime then this combination of illiquidity and volatility could prove very awkward! It also means that the ultimate beneficiaries could end up receiving far less value than was originally invested. If they have been saved 40% tax by virtue of BPR but the assets have fallen in value by 50% they will not be desperately grateful.
It is much easier to ensure shares remain “relevant business property” where they are shares in a family firm rather than AIM shares. Indeed, it is holdings of this nature that BPR was originally intended to provide for.
So, using AIM-listed shares to attract BPR and thereby mitigate IHT when passing wealth to the next generation can work – if everything goes well. But it is a high-risk route to take. The shares may turn out to be non-qualifying at the date of death, in which case IHT at 40% might be payable. They may have fallen in value, possibly very significantly, by the time beneficiaries receive them.
For more information about Business Property Relief and AIM Listed shares, please speak to Damon Holliday, Consultant in Druces LLP’s Private Client Team*Claw-back: A restriction of BPR where the transferor dies within seven years of the transfer of any ‘relevant business property’ and the transferee has made a further transfer of the property in that time. A transfer to an individual is a Potentially Exempt Transfer (PET), whereas a transfer to a discretionary trust is an immediately chargeable transfer. So where a transferor dies within seven years of making the transfer claw-back will apply to restrict the amount of relief available (depending on how long has elapsed since the original transfer). However, any such claw-back will be at 20% (the lifetime rate at which it would have been charged but for the availability of BPR) on the immediately chargeable transfer into discretionary trust, but at 40% (the rate on death) on the PET to the individual. Furthermore, a transfer into discretionary trust also protects the assets in the event of the personal bankruptcy or divorce of a beneficiary, or if they have to go into residential care (provided that the discretionary trust was not created in order to defeat an assessment under CRAG) – three good reasons to use trusts rather than gifting assets absolutely. It is also likely that trustees would be more aware than an individual of the risks in making a further transfer of the property within seven years. This is an abbreviated version of an article by the same author for publication elsewhere.