Chancellor Rachel Reeves has halved the inheritance tax (IHT) relief on shares in stocks quoted on the Alternative Investment Market (AIM).
This announcement was made during the Autumn Budget today (30 October).
IHT chargeable on most AIM shares will now be set at a rate of 20%, half the potential 40% benefit that was previously available.
AIM stocks let shares be passed on tax free if held for at least two years before an individual dies.
Abrdn manager of UK Smaller Companies Fund, Abby Glennie, said: “The government did not quite throw in the hand grenade for AIM entrepreneurs and investors that many expected – and valuations of AIM companies ticked up immediately after the announcement, supported by buying demand. However, IHT applied on AIM assets at 20% still makes investing in the market less attractive than previously.
“With tax benefits halved, investors will need to be more positive on return prospects to allocate cash to AIM and this could swing allocations towards other areas.
“UK smaller companies have been battered by a decade of difficulties – from the collapse of their natural investor base (UK pension funds) to increasing regulation – so now is the time to be looking at how we can support them, not pull the rug out from under them.
“AIM aligns with the rhetoric on investing in growth and innovation, and the tax cuts on IHT here go against supporting external capital investment in this area.
“Ultimately, it is not the companies who are the issue. The quality and growth dynamics remain strong, and very competitive versus listed smaller companies markets globally. The problems are external – and, with the right policy conditions in place, we could really see this area of the stock market thrive.”
Charles Stanley chief investment analyst Rob Morgan added: “A small blow to AIM and relief there’s not a knockout punch.
“We need a vibrant AIM market with a varied range of participants to help support these important businesses with growth capital, and a cap on relief will affect the market to a degree.”
The Institute for Fiscal Studies said in April that abolishing IHT relief on AIM stocks would raise £1.1bn in the 2024-25 tax year, rising to £1.6bn in 2029-30.
In early October, research from national accountancy group UHY Hacker Young stated the amount of initial public offerings (IPOs) on the AIM has fallen to its lowest level since the global financial crisis.
Chelsea Financial Services and FundCalibre managing director Darius McDermott previously told Money Marketing doing damage to the AIM market now “might make it unfit for purpose”.
GSB Wealth partner Craig Ritchie added: “Bringing AIM stocks into the scope of IHT, even at a reduced rate, will have a negative impact on the value of smaller UK companies, decimating the viability of AIM as an IHT planning tool.”
The AIM was launched in 1995 and has helped more than 3,988 companies raise over £130bn.
The AIM is a sub-market of the London Stock Exchange (LSE) that is designed to help smaller companies access capital from the public market.