UK stocks listed on the Alternative Investment Market (AIM) will have a 20% inheritance tax applied to them, as part of a range of inheritance tax measures aiming to raise up to £2bn.
The measures, which will still see a 50% relief applied to AIM-listed stocks, has provided UK small-cap investors with some relief, following rumours that any tax relief would be abolished completely.
See also: Autumn Budget 2024: Chancellor extends IHT threshold freeze to 2030
Abby Glennie, manager of the abrdn UK Smaller Companies fund, said the UK government “did not quite throw in the hand grenade… that many expected”, with the AIM market having ticked up immediately after the announcement from Chancellor Rachel Reeves.
Dr Clifford Gross, CEO of Tekcapital, went as far as to say that today’s Budget “provided certainty for London’s junior market”.
“London has long been a hotbed for exciting companies seeking to raise capital and scale their companies,” he said. “By announcing 50% IHT relief for AIM shares instead of altogether abolishing relief, the government has signalled its intention to make the UK a favoured destination for global growth companies to list.
“Fears of damaging changes to the tax incentives available to AIM companies have proved overblown. Despite tax incentives encouraging estate-planning investors to invest in AIM companies, good quality growth companies will attract investor pounds over time, enabling them to maximise their potential.”
Amisha Chohan, head of small-cap strategy at Quilter Cheviot, said while it is “disappointing” that AIM stocks will no longer be completely exempt from inheritance tax, she is “pleased the government has seen sense to retain some sort of incentive” to help drive the growth of smaller companies.
With an effective tax rate of 20%, instead of IHT’s headline rate of 40%, AIM businesses, along with their growth potential, continue to give investors a compelling offer,” she argued.
“AIM shares have been depressed for some time, partly due to the inflation and monetary policy backdrop, as well as the build up to this budget. But with this hurdle now mostly cleared, and interest rates beginning to fall, there is a clear runway for growth for these smaller companies.”
Alexandra Jackson, manager of the Rathbone UK Opportunities fund, said the AIM market’s “punchy relief rally” after the Budget means that while the inheritance tax break has been halved, policy is “less onerous than feared”.
“Crucially, it gives certainty to AIM investors – we think after this cut, it’s unlikely this issue will be revisited again this parliament, and should allow the index to return to a more fundamental-driven era,” she reasoned.
However, Glennie pointed out that inheritance tax applied on AIM assets at 20% “still makes investing in the market less attractive than previously”.
See also: Autumn Budget 2024: Domicile status to be removed from tax system in 2025
“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,” she warned. “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.”
Rachel Winter, partner at Killik & Co, agreed AIM shares have “suffered the perfect storm” in recent years, adding: “Brexit has damaged confidence in British companies, and higher interest rates have made investors more risk adverse and less willing to hold shares in smaller companies. The AIM index lost half its value between late 2021 and late 2023.
“There were some tentative signs of a recovery in 2024, but the index had been heading downhill again since Labour’s victory in the election due to fears that Business Relief would be removed. The index has rallied today on the news that AIM shares will attract an inheritance rate of 20% rather than the usual 40%.”
Glennie said that 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 stockmarket thrive.”
