Uncertainty grows for investors and fledgling company financing as political fault lines open up on Inheritance Tax

Speculation that Labour is planning to scrap or restrict a number of tax reliefs that exempt certain assets from Inheritance Tax, while the Tories ponder scrapping IHT altogether, create a gathering cloud of uncertainty for both fledgling businesses and investors, warns Jason Hollands, Managing Director of investment platform Bestinvest.

Jason Hollands
Published: 29 Sept 2023 Updated: 29 Sept 2023
Inheritance tax

Uncertainty grows for investors and fledgling company financing as political fault lines open up on Inheritance Tax

Speculation that Labour is planning to scrap or restrict a number of tax reliefs that exempt certain assets from Inheritance Tax, while the Tories ponder scrapping IHT altogether, create a gathering cloud of uncertainty for both fledgling businesses and investors, warns Jason Hollands, Managing Director of investment platform Bestinvest.

Hollands said: “Recent weeks have seen considerable speculation over the future of inheritance tax at a time when receipts from this tax are at an all-time high, reflecting the corrosive effect of a nil rate band that has been frozen for 14-years. On current trajectory, increasing numbers of estates are set to fall into IHT, generating a bonanza for the tax man as the post-war ‘baby boomers’ pass away.

“Views on IHT are polarising. It is often identified as a widely hated tax, which in the eyes of some is tantamount to graveyard robbery. Others argue it can help to address inequality.

Hollands continued: “If recent speculation turns out to be true, then the two main Westminster parties are set to map out very different positions in the run-up to the fast-approaching General Election. However, on either of the mooted scenarios – a crackdown on IHT exemptions, or the reduction or scrapping of IHT altogether - there is a serious threat to a key source of financing for fledgling UK growth companies being choked off. This leaves both potential investors and small businesses caught between a rock and a hard place until policy positions become clear.”  

Business Relief was originally introduced in 1976 with the aim of preventing family-owned business being decimated by having to pay a significant IHT bill on the death of the owner. The relief reduces the value of qualifying assets as part of a deceased persons estate for IHT purposes. The assets must have been owned for two year and is assessed on death.

Assets potentially qualifying for Business Relief include many companies listed on the London Stock Exchange’s AIM exchange for small to mid-sized growth companies. It also includes companies raising funds under the Enterprise Investment Scheme – a state backed scheme which has  enjoyed the backing of previous Conservative and Labour governments.

Hollands said: “Portfolio services that invest in AIM companies that are expected to qualify for Business Relief for the purpose of mitigating IHT represent a very significant pool of capital for this end of the market. On an exchange like AIM which has no minimum free-float requirement and where there is limited liquidity, the marginal buyer can make a big difference to valuations.

“As for Enterprise Investment Schemes, alongside a 30% income tax credit on subscriptions to EIS share issue, potential eligibility for Business Relief is a major driver for investors taking the risk of backing small, illiquid companies raising money under this scheme. A key recommendation of last year’s Start Up, Scale-Up review commissioned by Shadow Chancellor Rachel Reeves was that ‘Labour should maintain and build on existing incentives, such as SEIS, EIS’. We would therefore hope that EIS companies would continue to qualify for this key relief under a Labour administration.   

“With IHT gaining prominence as an area of debate between the political parties, it is imperative that the politicians and their teams not only consider the impact on public finances and taxpayers but also the potential for collateral damage and disruption. Curtailing access to Business Relief in an abrupt manner, or scrapping IHT altogether, would have significant ramifications for access to capital by fledgling UK growth companies at a time when the economy is struggling and both parties have talked about the need to boost investment in this area.

“Policymakers therefore need to think carefully about whether alternative incentives – for example through income or capital gains tax reliefs – may be needed, as well as the timeline for implementing any tax changes. This might include transitional arrangements which would uphold access to Business Relief for assets purchased before a certain deadline to minimise market disruption.”

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By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of publication.

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About Bestinvest

Bestinvest is a multi-award-winning, digital investment platform and coaching service for people who choose to make their own investment decisions but with the support of tools, insights and qualified professionals. It offers access to thousands of funds, investment trusts, ETFs and shares through a range of account types, including an Individual Savings Account, a Junior ISA for children, a Self-Invested Personal Pension and General Investment Account.

Alongside providing investors access to an extensive choice of investments, Bestinvest also offers a wide range of ready-made portfolios for people seeking a managed approach that suits their risk profile, saving them the need to select and monitor their funds themselves. These include a highly competitively priced ‘Smart’ range that invests through low-cost passive funds, as well as an ‘Expert’ range that invests with ‘best-of-breed' managers. 

Bestinvest provides investors with a unique range of new features to help people better manage their long-term savings, including free investment coaching from qualified financial planners, low-cost fixed fee advice packages and advanced tools to help people plan goals and monitor progress towards achieving them.

Bestinvest is part of Evelyn Partners, the UK’s leading wealth management and professional services group created by the merger of Tilney and Smith & Williamson in 2020. Evelyn Partners is trusted with the management of £59.1 billion of assets (as of 31 December 2023) by its clients, who are private investors, family trusts, entrepreneurs, businesses, charities, financial advisers and other professional intermediaries.

Bestinvest is a trading name of Evelyn Partners Investment Management Services Limited, which is authorised and regulated by the Financial Conduct Authority.

For more information, please visit www.bestinvest.co.uk