WAY Investment Services is urging the Office of Tax Simplification to focus on simplification in its IHT review, by scrapping the Residence Nil Rate Band (RNRB) and aligning the rules for AIM with the rules for gifts. WAY experts say that cleaning up the rule book could generate additional revenue that could contribute significantly to funding care, as well as encourage more appropriate investment strategies by older investors.

In its feedback to the consultation, WAY experts recommended that the RNRB is removed completely, as the current rules are too complex and unfair, with a bias against people without children.

Whilst this could lead to reduced tax receipts, any loss of revenue could be more than countered for by aligning the AIM rules with the gifting rules for inheritance tax. Currently, certain AIM investments qualify for potential inheritance tax exemption after two years, which may seemingly offer an opportunity to mitigate inheritance tax in comparison with making a gift. But the rules can easily be misunderstood;firstly, only Business Property Relief (BPR)-eligible investments in AIM qualify for the exemption after two years, yet not all investors may be aware of this rule. In addition, clients may not be aware that they need to remain invested AIM for the rest of their life for the inheritance tax exemption to apply on their death.

WAY gives the example of a 60-year-old who may have a typical life expectancy of a further 24-26 years. Within such a timeframe, a holding may move from AIM – whether to another Index or outside a listing, which would require an investment decision to be made. Neither can there be any guarantee that the rules will not change again over the next two or three decades.WAY says that aligning the rules for AIM investments with the rules for gifting would create greater certainty, and encourage more appropriate financial planning strategies.

John Humphreys

The AIM market has recently been valued at approximately £108bn*, and it has been estimated that around a third of the investment has been invested with intention to mitigate IHT**. If the BPR rules were returned to the original Finance Act 1976 definition and AIM share investments were no longer IHT exempt after two years, WAY estimates additional IHT up to £14.4bn could be raised for the Treasury, which would more than offset any loss in revenue from scrapping the RNRB, as many of those invested in AIM may be unlikely to survive seven years.

However, WAY says that the inheritance tax relief on AIM investments should not be removed completely (unlike the Association of Accounting Technicians, who have suggested IHT relief on AIM investment be removed completely). Such a drastic move could be to the detriment of clients if it encouraged divestment for the wrong reasons and could have a very negative effect on AIM – with the potential for investments to devalue very quickly.

 John Humphreys, Inheritance Tax Specialist at WAY Investment Services, comments:

“We welcome the review into IHT that is taking place. It is clear that the rules have, over time, become far too complicated. Anything that needs to be explained through 18 case studies is, by definition, not clear – and that is exactly how the RNRB is explained on the HMRC website. The complexity of the rules also means they are open to mis-interpretation. The review now gives a great opportunity to step back and shorten the rule book. Scrapping the RNRB and adding the same incremental increases to the main NRBis a great place to start as it would instantly sweep away a whole layer of complexity and unfairness.

“The current rules for AIM investments encourage behaviour which may not be in clients’ best interests. The intention of the original Finance Act 1976 was for families to be able to pass down businesses without incurring an inheritance tax charge that would require the businesses to be broken up. As time has passed, that intention has been lost. The rules are driving people to invest in AIM to avoid inheritance tax, which should never be the primary motive.Investment in AIM is an extremely important part of the economy and young companies need to be given every change to succeed. But it is important to be realistic about the risks.

“AIM investments are being used by too many people as a quick fix for solving an inheritance tax problem. Whilst such investments are entirely appropriate for some, they certainly aren’t for all, especially older clients with reduced life expectancy. Yet this could be precisely the group that are being encouraged to make these investments. This is often the archetype tax tail wagging the investment dog and an investment dog.

“The issues of NHS and social care funding for the elderly and inheritance tax are inextricably linked, so we have to consider them together in order to find solutions. We strongly believe that any changes need to focus on simplification. This means aligning rules and removing unnecessary rules, with AIM and the RNRB key targets. We sincerely hope that the outcome of the review are clear, simplified rules, that encourage investment in the best interest of both clients and companies, leading to better outcomes for all.”

* Source: London Stock Exchange

** Source: Investor’s Champion