Before the Budget, there was speculation that inheritance tax (IHT) might be up for reform. Rules that exempt most shares quoted on London’s Alternative Investment Market (Aim) from IHT were said to be in line for rewriting.
In the event IHT was left untouched but calls to reform—not remove—this IHT exemption deserve another hearing.
Here’s why. The idea behind it is sound: to enable families that control companies quoted on Aim to pass on shareholdings from one generation to the next without being forced to sell stakes—and lose control—simply to pay the taxman. Enabling families to grow a business over generations makes sense, to me at least.
But the problem is that this break is available to everyone, no matter how few shares they own. That turns an effort to support family-controlled companies into an IHT avoidance scheme for all-comers. Just ask an asset manager to put your cash into a readymade portfolio of Aim shares and—so long as you survive for the stipulated two years—your heirs can sell the shares after your death and receive tax-free cash.
Granted, such “IHT services” increase the flow of investment into London’s specialist smaller-company market. But this money doesn’t flow to the -smallest, riskiest growth companies that are in sorest need of funding. Instead it goes into a group of larger, somewhat safer Aim -companies, driving up their share prices and creating the potential for bubbles.
The answer is clear: set a minimum size of shareholding (such as a member of a controlling family might own) to qualify for this tax break—3 per cent of the company, for example—and exclude anyone who owns less. That would convert an indefensible loophole into a usefully targeted scheme.