Tax breaks for UK investors willing to buy risky assets have come under scrutiny ahead of the Budget after finance experts called for the government to reconsider what policy objectives they achieve.
“Reliefs shouldn’t just sit there forever. They should be looked at both in terms of amounts and in terms of whether we actually need them at all,” said Bill Dodwell, tax director at the Office of Tax Simplification, a statutory body, giving evidence this week to MPs on the Commons Treasury select committee.
Dodwell encouraged the government to review if shares quoted on London’s Alternative Investment Market should qualify for business relief — which enables investors to pass on shares free of inheritance tax if held for more than two years.
Aim provides a lower-cost, less tightly-regulated alternative to London’s main stock exchange for small and medium-sized growing companies.
But their IHT advantages for investors have come into question as business relief was designed in the 1970s to ensure small family-run businesses could continue to trade after the death of the owner.
“If you are buying shares on the Aim market, you don’t need the inheritance tax relief in the sense that if you sold the shares it’s not going to affect the business at all,” Dodwell said.
The Treasury committee’s probe of tax reliefs follows a report by the National Audit Office, parliament’s spending watchdog, in 2020 which found that the UK had around 1,190 tax reliefs which cost the government £155bn in 2018-19.
Business relief, previously known as business property relief, is estimated to have cost the government £1.04bn in 2021-22, up from £465mn five years previously.
Arun Advani, professor of economics at the University of Warwick, told the FT the IHT relief available on Aim stocks is “a perfect example” of the problem with tax reliefs: “No-one knows why it is there, it distorts the market for those shares and it leads to a lot of tax being forgone.”
But tax practitioners caution that it is a difficult relief to withdraw without causing a mass sell-off of Aim stocks. “If the relief was going to be removed, a cliff edge removal would be a disaster; a phased removal of the relief over, say, 10 years would make more sense” said Tim Stovold, head of tax at Moore Kingston Smith.
“No one really knows how much of those markets are owned mainly for IHT purposes, but it is believed to be sizeable,” added Anthony Whatling, tax partner at wealth manager Evelyn Partners.
Whatling is not expecting to see any significant cuts to tax reliefs in the Budget on March 15 despite with growing calls within the Conservative Party to lower the overall tax burden.
But Advani said at a time when money is tight, the Budget would be a good opportunity to remove reliefs that don’t seem to be working, and set out a defined framework.
The Treasury committee also questioned the economic value of tax relief available to individuals investing in venture capital trusts, which has become increasingly expensive as VCTs raised £1.2bn in 2021-22, up from some £670mn the previous year.
For those prepared to take the risk and lock their money up for five years, VCTs provide 30 per cent income tax relief up front, with dividends and capital gains paid out tax free. They are increasingly viewed as a pension alternative for high earners.
“When I was a Treasury minister . . . I couldn’t get anyone to demonstrate to me that the venture capital relief had done any of what it said it should do,” said Labour MP and committee member Dame Angela Eagle, who was Exchequer Secretary to the Treasury from 2007 to 2009.
However, chancellor Jeremy Hunt confirmed in his autumn statement that the schemes would be extended beyond a “sunset clause” of 2025, signalling his support for the relief. Details are not yet confirmed.
Philip Hare, a tax specialist at Philip Hare & Associates, which advises VCTs and other tax efficient vehicles for investors in start ups, said the structures “provide a vital source of patient capital to early-stage, high-growth small businesses that would otherwise struggle to raise funding”.
Wednesday’s evidence session comes ahead of the closure of the OTS this spring, a decision made by former chancellor Kwasi Kwarteng in September, following criticism that the statutory body had failed to make the tax system simpler.
Treasury committee members indicated the closure decision could be a mistake and said they would write to the chancellor asking him to explain his justification.