Companies listed on the AIM market have long been an attractive holding for tax-conscious investors, thanks to their exemption from inheritance tax. However, some small-cap managers anticipate a mass migration away from the AIM market over the coming year after Chancellor Rachel Reeves halved their tax relief to 50% in October’s autumn budget.
Henry Lowson, head of UK alpha equities at Royal London Asset Management, explains: “There’s now a reasonable justification for having a lower proportion of your portfolio in AIM than you might have done in the past, so you’re already getting a number of companies announcing they will shift their listing.
“You’re going to see an exodus from AIM to the fully listed market over the course of the next 12 to 18 months, and that’s after a period where the small-cap universe has shrunk dramatically.”
The number of companies listed on AIM has withered to a third of its size since its peak in 2007, when the figure stood at 1,694. As at the end of April, AIM contains just 597 companies, with two of its largest constituents, Gamma Communications (with a £1.2bn market cap) and GlobalData (£996m), among the latest to announce their exits as the market loses the tax benefits that made listing there so appealing.
Back to the drawing board
The declining number of AIM companies may mark an opportune moment for investors to re-evaluate the small-cap market’s purpose. It was launched in 1995 with the goal of providing capital to the UK’s smallest companies and boosting their growth, yet it has suffered from a lack of appetite for some time now, dropping 28.7% over the past three years.
The government’s watering down of one of the AIM market’s greatest appeals may be a sign that a new approach is needed for supporting the growth of small businesses in the UK, according to Sue Noffke, head of UK equities at Schroders.
“There’s a lot of work being done on UK capital markets, and we’re likely to see more of a focus on driving investment into the main markets,” she says. “Clearly, there have been a lot of changes that have made people reassess what their investment portfolios look like, whether that’s for pension sheltering or heritage tax planning, and I think AIM’s purpose has to be rethought as to what it does, who it’s appealing to and whether it has really provided a home for growth capital in UK businesses or not.
“Capital markets should have a key role to play in underpinning economic activity across the UK and to do that they need to be vibrant and supported.”
William Tamworth, manager of the Artemis UK Smaller Companies fund, agrees the AIM market has drifted away from the fundamentals it was built upon 30 years ago. Its initial purpose was to incentivise smaller companies to list by offering less regulatory and financial burdens than the main market. However, many of the companies that have left AIM in recent years have cited excessive costs and red tape as a reason for delisting.
Cutting tax relief on these companies may be another step in the opposite direction to where AIM was supposed to be headed.
Tamworth says: “Given the tax breaks associated with AIM, we need to be clearer about its purpose. It should be a platform for raising capital for smaller, riskier businesses at the early stage of their growth.
“Paradoxically, making AIM easier to leave could mean it is more attractive to join in the first place. You could go even further and companies that reach a certain value – perhaps £500m – which have been consistently profitable over a specific period – perhaps three years – could automatically be promoted from AIM to the main market.
“This would focus the AIM tax breaks on the companies that need them most and make them more defendable.”
Read the rest of this article in the May issue of Portfolio Adviser magazine
