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.”