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Abolishing inheritance tax relief on Aim-listed shares at this month’s Budget would be “painful” and “unnecessary” but would not kill the UK’s junior stock market, according to a London Stock Exchange executive.
Chancellor Rachel Reeves faces a £40bn funding gap, fuelling fears of increases to capital gains tax and other levies, as well as the axing of tax breaks.
Aim investors have become nervous in recent weeks about the potential abolition of business relief, which allows owners of Aim-listed shares to pass these on when they die without incurring inheritance tax — usually charged at a rate of 40 per cent.
Many City heads are fearful that the removal of the tax break would have a devastating effect on Aim.
One small-cap fund manager told the Financial Times there was a significant risk that ending tax breaks that support Aim would lead to the market’s demise as investors withdrew. Company heads are fielding questions from fund managers about their contingency plans if the tax breaks are removed.
“There’s clearly a very heightened concern about business relief,” said Marcus Stuttard, head of Aim and UK primary markets at the London Stock Exchange, at a gathering of City executives on Thursday.
Any reduction or abolition of business relief “would be really unnecessary”, he said. “It would be painful, it would be unhelpful, but I have . . . confidence that we’ve got a much more broadly based market than one that’s just reliant on a single tax break.”
He insisted that the market would survive any removal of tax supports. “It’s really important that we don’t get wound up into a sense that the market is going to fail if business relief is abolished.
“It didn’t fail when taper relief was withdrawn; it didn’t fail when retail was pushed out of the market, when the prospectus regime came in,” he said, referring to previous government interventions.
Stuttard estimated that £6.5bn of investment in Aim companies were held through funds specifically marketed towards customers seeking to limit their inheritance tax bill, against Aim’s total market capitalisation of close to £75bn.
However, he acknowledged that valuations of Aim stocks had been hit by Budget speculation in recent weeks and forecast they would fall further if Reeves ends business relief.
Stuttard also hit out at “nonsense suggestions about scrapping Aim” in a report by the Tony Blair Institute and Onward think-tanks published this week.
The report said that Aim companies should be moved to the main market, but Stuttard said this “completely missed the point” because the Financial Conduct Authority now requires new main market companies to have a minimum market capitalisation of £30mn.
Investors are also bracing for a possible rise in capital gains tax, which City firms fear will reduce investor activity. Speaking at the same event, Winterflood corporate analyst James Wood said it would be “utterly crazy” to increase CGT significantly. Many entrepreneurs suffer three or four failures before creating a business that succeeds, he said: “You can’t punish people for their one final success.”
Others were less positive about Aim’s prospects. Myles Milston, chief executive of capital markets fintech Globacap, said Aim was “in decline” and “no longer fit for purpose”, citing “a persistent lack of liquidity, dwindling funding opportunities, low trading volumes and erratic share price movements”.