Threat to Aim shares

Could new Chancellor Rishi Sunak use next week’s Budget to cull inheritance tax relief on shares listed on Aim?

Isa investors could lose their only inheritance tax break, amid rumours that Rishi Sunak, the new Chancellor, is contemplating scrapping an exemption on the 40pc death toll for small businesses.

Known as business property relief (BPR), the tax break allows family businesses to pass down the generations without being sold to meet hefty tax bills.

It also exempts businesses listed on London’s Alternative Investment Market (Aim). Qualifying shares are 100pc exempt from the death duty, providing certain conditions, such as owning the shares for at least two years, are met (for more on how shares qualify see box, right).

These generous tax breaks are designed to encourage investment in small and emerging enterprises, which savers may otherwise avoid due to the greater level of risk involved with investing in less established firms.

They are popular with older savers, who are typically more concerned about preserving the legacies they will leave behind. Almost seven million people over the age of 65 have an Isa, and in 2013 the Government introduced new rules allowing Aim stocks to be held in the tax wrapper for the first time.

Isa savers could now shield their nest eggs from the taxman on death. Previously, everything held within an Isa – which protects investments from income and capital gains taxes in life – was counted as part of your estate on death and subject to IHT.

Were these exemptions to be removed, it would cause the value of the Aim market to plummet and push older savers into riskier ventures, according to Alex Davies of the Wealth Club, an expert in tax-efficient investing.

“A lot of these shares are pregnant with investment from people looking to mitigate their tax liabilities. If these incentives for investments were removed, it would cause carnage. A lot of these stocks would fall in value and the fall would be quite severe,” he said.

He added that wealthy investors would be unlikely to save any more into their pensions, which also fall outside of a deceased’s estate for tax purposes, due to the lifetime limit on savings, which is capped at £1.055m.

People seeking to avoid IHT would be pushed into riskier options such as the Enterprise Investment Scheme, a venture capital project, or forestry, he said. EIS investments are also free of IHT but qualifying companies are even less established than those on the Aim.

Tom Evennett of accountants EY said business property relief could be tweaked or even abolished as part of a wider review into IHT to be announced in the Budget on March 11.

It follows calls from the All-party Parliamentary Group on Inheritance Tax and Intergenerational Fairness to remove all but the most vital IHT reliefs such as breaks for spouses and charities, and slash the rate to just 10pc.

A review from the independent Office for Tax Simplification, commissioned by ex-chancellor Philip Hammond, said the Government should consider introducing more stringent rules on which businesses should qualify for the exemption.

At just one broker, Hargreaves Lansdown, around 360,000 investors own Aim shares. Their legacy planning could be left in tatters. But Sarah Coles, a per

sonal finance expert, said Isa investors needed to be aware of the risks of Aim shares and said tax worries should not override an entire savings strategy. The most popular Aim shares among Hargreaves investors included online fashion retailers Boohoo.com and Asos, drinks company Fevertree and online estate agents Purplebricks.

But while some shares have performed well over the long term, others have left savers with huge losses. Judges Scientific, a supplier of industrial equipment, was the best performer over the past decade, according to AJ Bell, another broker, turning a £1,000 investment into more than £4,250.

Had you invested with video game designers Bidstack, oil company Ascent Resources or biotech firm Valirx over the same period, however, you would have lost every penny.

‘If these incentives were removed, it would cause carnage – a lot of the stocks would fall in value and the fall would be quite severe’