This reduction in inheritance tax is doomed to failure, with serious consequences for investors

A much-loved move by financial advisers is to invest in shares listed on the London junior market, which, under certain conditions, are not subject to tax on death.

As a result, thousands of small investors have flocked to the Alternative Investment Market (AIM), largely for tax reasons rather than because the companies themselves are particularly attractive investments.

The IFS says the tax break “distorts investment choices towards these types of stocks, particularly for older people seeking to minimise their inheritance tax liability” and argues that removing it would raise £1.1bn this financial year and £1.6bn a year by 2029-30.

These shares are not subject to inheritance tax because they qualify for “business property relief,” a tax break introduced in the 1970s to prevent family businesses from being broken up or sold to pay a tax bill.

But as inheritance tax has hit more families, fund managers such as Octopus Investments have launched special ready-made portfolios, designed to be tax-free in the event of death. Some of the biggest holdings include Renew Holdings, an engineering firm, video game company Keywords Studios and anti-fraud software company GB Group plc.