The government will be reducing the rate of business property relief from April 2026 to 50% in all circumstances for shares designated as “not listed” on the markets of a recognised stock exchange, such as AIM but introduced a new 20% inheritance tax on AIM shares.
Eustace Santa Barbara co-manager of the IFSL Marlborough Special Situations, UK Micro-Cap Growth and Nano-Cap Growth funds welcomed that after months of uncertainty, “conjecture can give way to much-needed clarity”.
He said: “It’s good that the government has recognised UK smaller companies’ role in driving growth and has stopped short of what could have been a damaging move. We’ve always said investment in these businesses isn’t rooted in hoping to catch a tax break. It’s rooted in the expectation of excellent long-term growth. Even if we had witnessed a worst-case scenario today, we would still regard the holdings in our portfolios as great companies with strong prospects.
“Looking ahead,” he added, “we now expect the AIM market to perform well and the large discount that has developed in the face of uncertainty to narrow. This might not be the catalyst for a dramatic turnaround in investor sentiment on UK smaller companies, but we see it as a step in the right direction.”
James Henderson, manager of the Henderson Opportunities Trust, Lowland and Law Debenture investment trusts, was relieved to see the chancellor not entirely scrap IHT relief on AIM stocks. He said: “Before the budget people were saying that scrapping BPR would see AIM stocks fall as much as 30%. We still need to see more done to revitalise AIM but the fact that the market actually went up afterwards tells you that the doom had been priced in and that scrapping half the relief is a lot better than many feared. It also has to be put in the context of the imposition of IHT on pensions. Some may take the view that it is better to pay 20% IHT on AIM stocks than perhaps 40% on their pensions.”
However, Susannah Streeter, head of money and markets, Hargreaves Lansdown, said the reduction of tax breaks on AIM quoted stocks was “a blow for investors in the small-cap market, and although some have clawed back losses given the business property relief was not completely scrapped, trading is likely to remain volatile. Investing in such companies, given how fledgling some are, is a risk, and some investors might have been prepared to take given that IHT wasn’t due on such portfolios as long as they had been held for two years or more. There could be longer-term economic implications here given that this small change might have big repercussions when it comes to creating a nurturing environment for entrepreneurial businesses, which may be counter-productive to the Chancellor’s growth agenda.”
Chris Lewis, Chair of the VCT Association, following today’s budget: “Given the tax changes announced today, the benefits of VCTs for both investors and entrepreneurs are even more compelling. VCTs provide tax-efficient investment opportunities while offering patient capital that is reinvested to support the long-term growth of UK businesses. The scheme also continues to offer a tax-efficient way to invest in the AIM market despite the new 20% inheritance tax on AIM shares. Now is a pivotal moment for close collaboration between the VCT industry and the UK Government to seize the opportunity for growth.”
This was echoed by AIC Chief Executive, Richard Stone, who said while bringing all AIM shares and pension funds into the scope of inheritance tax will act as a disincentive to build and retain those long-term investments for the benefit of future generations, everybody can make capital gains on their stocks and shares up to the annual allowance of £3,000 before being liable for any capital gains tax. Investors should make full use of tax-efficient ways to invest – the pension allowance and ISA allowance. Investors may also want to consider VCTs which invest in small and high-growth UK companies.”
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