The inheritance tax break for AIM has been partially abolished in the Budget, as only a 50 per cent relief from inheritance tax will be applied to its shares, setting the effective tax rate at 20 per cent.
The move came from Chancellor Rachel Reeves today as part of a host of inheritance tax measures meant to raise as much as £2bn.
The FTSE AIM 100 index jumped 4.3 per cent in the minutes after as a result, setting it up for its biggest one-day rise since April 2020.
Rumours had swept the City that AIM’s business rate, which allows stocks to be inherited without being taxed if held for more than two years, would be scrapped to raise around £1.4bn.
Investment bank Peel Hunt calculated that if full scrapping of the tax break had been implemented, 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.
This would lead between £14bn to £20bn of investor value to evaporate, leading to a large number of AIM companies either delisting or moving to the main market.
“The government did not quite throw in the hand grenade for AIM entrepreneurs and investors that many expected,” said Abby Glennie, manager of the Abrdn UK Smaller Companies fund.
However, Glennie warned that with tax benefits from AIM halved, “investors will need to be more positive on return prospects to allocate cash to AIM and this could swing allocations towards other areas”.
The move not to go all the way on abolishing the tax was a sign of “reassuring support, especially for smaller companies and the high street,” added Laurence Hulse, manager of the small companies-focused Onward Opportunities trust.
Chief of the London Stock Exchange Julia Hoggett wrote to City minister Tulip Siddiq last month warning that the “ongoing viability” of the junior market would be threatened if the inheritance tax break was eliminated.
Even the head of AIM said that while the market would survive the hit, it would cause a “significant slug of capital” to exit.
“It would be really unnecessary, it would be painful, and it would be unhelpful,” said Marcus Stuttard, head of AIM and UK primary markets at the London Stock Exchange Group.
Meanwhile, over 100 London-listed companies, including Fevertree and Yougov, wrote to the Chancellor warning that uncertainty around the tax relief was causing a significant dip in their ability to fundraise.
Some 92 companies have delisted from AIM in the past year, with the total number of companies on the junior exchange falling below 700 for the first time since 2001.