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I’m one of the vanishingly small number of people who think inheritance tax is a cracking idea and very rational. Almost all the rest of the UK population hates it, which helps explain why there are so many wrappers and structures designed to minimise it.
One of the most popular in recent years has been using a subsection of stocks on Aim to claim business relief, a sensible tax relief first introduced in 1976. There’s a considerable debate about business and agricultural relief changes, but that’s not my beef for today. My point is that from an investment point of view, we now have a stable regime for business relief (for good or bad) that might actually — accidentally, I would argue — achieve the chancellor’s aim to help private British businesses.
I said “accidentally” because the business relief applies to 100 per cent of assets up to £1mn, and at 50 per cent thereafter. But for owning Aim shares, you get no such buffer: the relief has been cut in half to 50 per cent. Anyone who holds Aim shares in their Isas for IHT relief will find themselves in something of a quandary. Suddenly, Aim looks even less attractive than it already did — and Aim, in my view, has been a multi-decade let down.
Talking to investment insiders, I understand a fascinating transformation is under way. Many are looking at business relief solutions from well-known firms such as Octopus, Downing and Time Investments. These services allow investors to obtain business relief from supporting British private assets (the kind of stuff that private equity has traditionally invested in), such as lending to SMEs or renewable energy projects.
One of the biggest providers in this space is Octopus, which offers IHT relief through a business called Fern, which, among other things, is the UK’s largest producer of solar energy from commercial-scale services. Another leading provider, Downing, offers a similar service targeting a return of 3 to 4.5 per cent over the medium term by investing not only in renewable assets, but also care homes and specialist education schools.
You cannot currently hold these assets in an Isa wrapper, but you can transfer the money into these investments and enjoy the relief.
The accidental upside to the changes is that, under the old rules, you only invested in the trading shares of Aim companies — not necessarily in funding their growth or capex.
The alternative is to invest directly in a private business that owns those UK private assets and get the business relief, up to £1mn.
And the reality is, nothing is stopping private business relief solutions from investing in things such as data centres or big film studios — anything that will directly benefit the UK.
Whether these private business relief investments are good or bad is for investors and their advisers to decide. But this could be a net positive for the chancellor’s plans to kickstart growth for private British companies, especially if there is a wave of Aim switches in the next few months.
It’s fair to say that some insiders don’t share my enthusiasm. The founder of one major investment platform cautions that they think less money might go into these private investments largely because a “massive slug of all this money comes from the very richest”, and “they will have already used their £1mn allowance”.
Business relief isn’t restricted to the structures I mentioned above. Younger businesses, helped along by the enterprise investment scheme (EIS), are also eligible for business relief. You can receive 30 per cent tax relief on the investment in the company and roll over any outstanding capital gains. Then you can also claim business relief on the investment for IHT purposes (but only up to £1mn).
As this tax relief becomes more widely understood, I can see adventurous types taking a more venture capital-based approach. Yet there will be challenges.
An expert on EIS schemes, Alex Davies, founder of Wealth Club, a major online platform, says that one such hurdle is valuing the businesses on death. “The reality is that while on paper these very early-stage businesses could be worth a lot of money, on the day you die, you can’t just go and get the money back; it might be years off an exit.”
But stabilising the business relief structure also opens up what I think could be a revolutionary prospect: getting our trillions of pounds invested in pensions that work for the benefit of UK business.
As well as changing business reliefs, the government says it will abolish the IHT exemption for pensions from 2027. It’s already possible to invest in a private business via a self-invested personal pension, but very few providers allow it (it’s a bit complicated and thus expensive to administer).
On paper, it should be possible to use business relief structures to mitigate any future IHT on a pension via some of the products I’ve mentioned. That, to me at least, seems a much more sensible reform than forcing pension fund managers to hit some arbitrary percentage of investment in British public and private businesses.
In my scenario, if you want to avoid IHT on your pension, all you have to do is invest via business relief structures (up to £1mn), and then you get the IHT relief. Sure, it might be risky but, crucially, it would be your choice — not some rule ordained from on high — and you’d be aware of the risks, as Aim investors have had to be for some time.
David Stevenson is an active private investor. Email: adventurous@ft.com. X: @advinvestor.
