What’s the AIM of taxing investors?

By Philip Harrison, tax specialist and consultant to The Wilkes Partnership

The coronavirus has hit businesses and individuals hard. But it could have been an even harder fall if it wasn’t for the government rolling out the furlough initiative and business loans to support both workers and employers. Unfortunately, this comes at a cost. And with the UK only just starting to ease itself away from austerity measures, the government will have to claw some money back because it cannot afford to bankroll its population.

Currently, the focus of the nation is on getting through the coronavirus crisis and coming out of the other side with the health, jobs, personal possessions and property of its people intact – whether that is through cutting personal budgets or asking for payment holidays from lenders. But once these issues and concerns are satisfied, the bill from this economic and health crisis will unravel.

Many analysts have suggested that paying for these costs of coronavirus could come direct from the taxpayer, but with more than nine million people on furlough at its peak costing an estimated £14bn a month, and UK Finance saying that by June, £38bn loans had been lent to businesses through the three main government-backed Covid-19 loan schemes there is a growing bill that taxpayers may not be able to cover.

These schemes – the Coronavirus Job Retention Scheme, the Bounce Bank Loan (BBL), the Coronavirus Business Interruption Loan (CBILS) and the Coronavirus Large Business Interruption Loan Scheme (CLBILS) – will have won many voters’ favour, but paying for them through taxpayers (voters) could be election suicide.

Other suggestions to paying this bill have been to bring back a long period of austerity. However, this was ruled out when, in an interview in June, the Prime Minister said, the UK will “not go back to the austerity of 10 years ago”. Another, much more radical suggestion, is to print money to cancel out all Covid-19 debt as all countries across the globe suffer from the economic effects of Covid-19. But there are many repercussions and international cooperation hurdles associated with that action.

This leaves a conundrum for government. Where does the money for this bill come from? In part at least, the logical conclusion may be to turn to tax breaks that have been left alone for a long time and may no longer be perceived as ‘fair’ or productive in terms of their original objectives. One of these areas involves the AIM. This could be the time the government finally puts AIM investors in its crosshairs and takes aim.

For these investors, the breaks they have enjoyed for years could finally be at real risk and they will need to consider what advantage AIM is to them, and why they want to invest in it.

Why does AIM have a tax break in the first place?

In 1980, the Unlisted Securities Market (USM) was formed. Created by the London Stock Exchange (LSE) it allowed companies that didn’t want to list all of their stock, or didn’t have the trading history required to list on the LSE, to be traded. In 1995, the USM was replaced by the Alternative Investment Market (AIM).

This allowed many young companies that weren’t as stable, didn’t have the established and experienced leadership or the financial resources of an LSE listed company, to trade. For smart investors this was an exciting new plain to find success on, and they did. In this way AIM created new investment for (relatively) small businesses and saw many of them reap rewards from this fresh investment to enable them to grow. It also allowed the owners of established family businesses to achieve a partial exit in a way that would not have been possible through a full listing.

However, while there was opportunity to make money, the nature of the businesses on AIM meant investments could decline as quickly as they grew. What private investors love more than anything else is security and lowering risk. But AIM was not for the faint-hearted.

To encourage investment coming in and to acknowledge the risks for investors, AIM shares (like USM shares before them) were treated as ‘unquoted’ for tax purposes. Amongst other benefits, this meant that they were capable of qualifying for 100% business property relief (BPR) from inheritance tax (IHT).  AIM-listed shares would not suffer IHT on the owner’s death provided they had been held for two years (sometimes less) and provided the company was a trading business.   BPR is a long-standing relief designed essentially to allow family businesses to be passed from generation to generation without the devastation which estate taxes could otherwise cause.

Thanks to the success of many AIM listed companies the market, which started with 10 companies valued at £82.2 million, has now soared to around 850 companies with a combined market cap of £104bn. Since 1995, the LSE estimates that companies have raised more than £115bn on AIM with the average company raising £21.4m.

If the LSE is the goose’s golden egg, then the AIM is the silver egg hiding under its wing.

With these huge figures bandied around it is clear that AIM is not just for ambitious start-ups any more. Undoubtedly, AIM has been a success. There is some major stock floated on the market, and as such the risk of AIM investment is not what it once was.

The reduction of the risk has led to the use of AIM investment by older people with the express purpose of creating an IHT shelter after just two years, compared to seven years for gift-based planning. It might be possible to conclude that it is no longer fair for investors in this much more mature market to benefit from a relief which is unavailable to investors in the main market. But there is another change to when the market started. There is not as much new money flowing into companies – much investment is by way of buying from existing shareholders and the old trade is being slushed around and becoming stale.

It could be argued that the objective of the tax break – to encourage the provision of essential funding to dynamic developing companies – is no longer being fulfilled.

The government could well see AIM as a potential pot to dive into. Perceived threats to BPR are not new: as long ago as 1997 when New Labour came to power, there were fears that BPR (and its close relative agricultural property relief) might even be abolished entirely.

What should investors do?

In a climate where government is increasingly likely to look for ways and means to pay its bills, is it prudent for investors using AIM for BPR reasons to consider a ‘Plan B’?

The key thing for investors at this point is to ask themselves what their stock in AIM is for. Is it a secure way to make sure that relatives will get the most that they can leave them, or is it because they want to see their money grow and are willing to play the market?

If it is the former this could be the time to consider planning for the future. There is still time, but the government is going to have to search for tax pockets within its reach at some point in the near future.

One possibility is to consider dropping your AIM stocks into a trust for the benefit of your family whilst they still qualify for BPR. The ‘roadblock’ is that for this to succeed in removing the stocks from your estate, the donor can’t benefit from the asset after gifting and this may be a deterrent to some who originally invested in AIM for IHT planning reasons. Also, if BPR is subsequently withdrawn or the shares sold, the donor will still need to survive seven years after the original gift into trust. This does create an issue, but crystallising the relief before it can be removed still counts as a sensible planning option to consider.

So, what’s the aim of taxing investors? This is a big opportunity for government to help pay back the billions in furlough and guaranteed loans, not to mention bridge the gap in lost revenue from taxes such as fuel duty (£2.4bn during lockdown) and VAT on imports and exports (exports down by £33.1bn, imports down by £29.9bn). And with the government looking to make sure there is no return to austerity and keep voters on side, all tax breaks within reach (big and small) could well be considered fair game. But there are options and experienced estate planning and private client tax lawyers can help. The decision for investors is what to do next. Is now the time to take the next step in IHT planning?

For more information on estate and tax planning, please contact Philip Harrison and the private client team at