Ahead of the autumn Budget on Wednesday 30 October 2024, speculation is rife about which taxes chancellor Rachel Reeves will enact. One idea that has been greeted by an outcry is removing inheritance tax relief from shares listed on the Alternative Investment Market (AIM).
Business relief, which allows investors to pass on business assets to their beneficiaries free from inheritance tax when they die, currently covers AIM-listed shares, which is why they have become an important part of intergenerational wealth planning for many financial advisers, wealth managers and their clients.
Peel Hunt predicted in an interview with the Financial Times that if business relief were removed and financial advisers encouraged clients to sell their shares, the valuations of AIM-listed companies could fall by a third.
Victoria Stevens, a fund manager in the Liontrust Economic Advantage team, thinks abolishing business relief would be an own goal for the chancellor, flying in the face of her pro-growth mission.
“The government has explicitly set out an agenda to promote economic growth in the UK by supporting investment into the engine of that growth – the companies right across the country which employ local workforces, innovate to develop new products and services and already pay back a substantial amount in tax,” she pointed out.
“The UK’s junior stock market was set up for the very purpose of supporting these growth businesses and it would be a contradictory and painfully ill-judged move to withdraw this important incentive at the very moment when such companies would otherwise, finally, be looking forward to the prospect of a strong revival in their hard-hit share prices with the improving economic backdrop.”
Jessica Franks, head of investment products at Octopus Investments, agreed. “Providing investors with business relief on qualifying shares in unquoted and AIM-listed companies should be seen as one of the big success stories of the past 20 years or so. It has encouraged suitable investors to take more risk with some of their capital, investing it in growing businesses for the long term,” she said.
The risk/reward characteristics of enterprise investment schemes (EIS), venture capital trusts (VCTs) and AIM stocks would all change without tax relief, Franks said, “making them unsuitable for many existing investors and significantly reducing critical support for UK capital markets”.
“AIM has never existed without business relief, so concern around the impact of its removal is understandable,” Franks concluded.
For Stevens, however, any short-term negative sentiment stemming from taxation concerns would be a buying opportunity. “Given the absolute and relative underperformance of the AIM market since early 2022, a great many of our holdings are already trading at extreme discounts to their long run average valuation and yet nonetheless continue to exhibit strong fundamentals and growth prospects,” she said.
“We are therefore ready to take full advantage of any shorter-term sentiment-driven impact on share prices if there is a level of indiscriminate selling.”
Meanwhile, demand for AIM-listed shares is holding up, according to Puma Investments. It recently launched its Puma AIM VCT – the first new AIM VCT to be launched for 17 years – in response to “strong demand from the financial adviser and wealth management community”, a spokesperson said.
Octopus AIM VCTs also launched a £30m fundraise this week.
The performance of AIM VCTs in general has been “lacklustre” during the past few years but there are reasons for optimism going forward, said Nicholas Hyett, investment manager at Wealth Club.
First, “a lot of the pain is now in the rear view mirror” and valuations are consequently low, “creating scope for a recovery if sentiment turns”. Second, if Reeves decides against taxation changes, Hyett thinks “a flurry of new listings could reinvigorate the market”.
“Finally, the pain suffered by the highest risk AIM companies mean AIM VCT portfolios are now weighted towards the more mature investments they made years ago,” he concluded.
“For contrarian investors, the appeal of backing an unloved market (AIM) within an unloved country (UK), may prove an enticing prospect. An AIM VCT provides access to this theme with 30% income tax relief and tax-free returns.”