HMRC to raise £1.1 billion through scrapping 'unfair' tax relief loophole

Scrapping a supposed "unfair" inheritance tax relief loophole could raise billions for HMRC. David Sturrock and research fellow Arun Advani, have written a study for the Institute for Fiscal Studies (IFS) and called for reform to make IHT fairer and generate more tax revenue.

The AIM (formerly called the Alternative Investment Market) is the London Stock Exchange’s market for small and medium-sized growth companies. Since 1996, shares listed on the AIM that have been held for at least two years before death get a 100% relief from inheritance tax as part of business relief.

This distorts investment choices towards these types of shares, particularly for older people seeking to minimise their inheritance tax liability. There is no rationale for this relief based on supporting family businesses as AIM shares are held at arm’s length in a similar way to regular shares.

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They wrote: “If rural land can be passed on free of inheritance tax when farmed, but not when used for conservation purposes, it clearly disincentivises the latter. This creates understandable pressure for a tax break, leading to a new carve-out and reduction in revenues.

“The fundamental problem here is that once a relief is created, there are always arguments for expanding its scope to avoid some unfairness at the margin. The root of the problem is the creation of the special relief in the first place.”

IFS estimate that the removal of business relief for AIM shares could raise around £1.1 billion in the current tax year, rising to £1.6 billion in 2029–30. This could be an underestimate, since business relief on AIM shares is used very heavily by trusts, for which no direct statistics are available. If those currently using AIM shares to avoid inheritance tax would respond to its removal by using other avoidance strategies, the amounts raised could be lower, though.