London’s AIM is under threat of “irrecoverable damage” if Labour scraps the inheritance tax relief on the junior market’s stocks, City analysts have warned.
Rumours are swirling in the City that Chancellor Rachel Reeves could remove the inheritance tax break on AIM shares, which let shares be passed on tax free if held for at least two years before an individual dies, in the upcoming Budget.
The move risks crashing the market for small companies in the UK and could even be a “Liz Truss moment” for the new Chancellor, Darius McDermott, managing director of FundCalibre, told City A.M.
“Unfortunately, Rachel Reeves may be on the verge of doing irrecoverable damage to the AIM market and creating market chaos for smaller companies – many of which, are the lifeblood of the British economy,” McDermott said.
Funds that exist specifically to benefit from the inheritance tax breaks on AIM invest around £6bn in the junior market, along with an additional £5bn of direct equity investments from founders, families and individual investors, according to investment bank Peel Hunt.
These funds have “become an important part of the AIM ecosystem,” said Charles Hall, head of research at Peel Hunt.
If that money is pulled, 15 per cent of the total cash in AIM could disappear overnight, causing a 20-30 per cent drop in the value of the junior market, the investment bank said.
This would lead between £14bn to £20bn of investor value to evaporate, mainly from the pockets of UK citizens and employees of UK companies, and a large number of AIM companies would either delist or move to the main market.
Amisha Chohan, head of small cap strategy at Quilter Cheviot, said the tax relief had been “instrumental in supporting UK small- and medium-sized growth companies”.
“Removing the inheritance tax benefits would contradict Labour’s claim to prioritise economic growth and could drag down share prices of these growth companies, eroding value in the UK stock market at a time when UK capital markets are already under intense pressure,” said Chohan.
McDermott also noted that as many AIM stocks are down from their peaks when people bought them during the pandemic bull market, a further fall could leave investors looking to sell “regardless of how cheap they are, just to generate losses to offset other capital gains they have”.
Scrapping the tax relief could raise £1.1bn this year, potentially increasing to £1.6bn by the end of the decade, according to the Institute for Fiscal Studies.
However, Peel Hunt estimated that given the potential level of capital losses and the negative impact on AIM and economic growth, the reduction in the tax take could go as high as £1bn a year.
When asked if the government was considering the change, a Treasury spokesperson told City A.M. that it was “committed to reinvigorating our capital markets, to attract the most innovative firms to list in the UK”.
“The Chancellor has been clear that difficult decisions lie ahead on spending, welfare and tax to fix the foundations of our economy, and any decisions on how to do that will be taken at the Budget in the round,” they added.
London Stock Exchange Group declined to comment on the specific policy of inheritance tax break abolition for AIM.
However, a Grant Thornton report commissioned by LSEG was published yesterday, stating that removing “the various fiscal incentives and reliefs that encourage investment… risks reducing equity investment even further”.
“A reduction that will hinder the growth of innovative and ambitious businesses. A reduction that will impact local economies across the UK,” the report added.