Amisha Chohan, head of small cap strategy at Quilter Cheviot, looks at how the tax treatment of AIM shares and suggests three ways to improve current sentiment for the market.
Following changes to the inheritance tax treatment of AIM shares, Quilter Cheviot, the wealth manager, has identified three ways the government can boost sentiment in UK smaller companies and benefit wider capital markets.
The Budget in October 2024 saw AIM shares lose their 100% business relief status. A new business relief was put in place, subjecting AIM shares to 50% of the normal inheritance tax rate from 6 April 2026.
Consequently, UK stocks listed on AIM will now have a 20% inheritance tax applied to them, as part of measures aimed at raising up to £2bn.
Despite the changes not being as drastic as first feared, the government now has to support the market to help drive some positive sentiment in UK growth companies.
The changes announced in October are due to implemented next year, but already we are seeing AIM shares suffering as a result. Profit warnings are being issued that we wouldn’t usually expect, and companies are questioning whether being listed on AIM brings enough benefit.
AIM shares contribute a great deal to the UK economy and are our companies of the future. There have been a number of success stories on the junior market, including several that have graduated all the way up to the FTSE 250 over the years. However, these companies now face an uneven playing field with their unlisted, and illiquid, counterparts as a result of the rule changes.
We do not want to see this vital market stifled at a time when the UK capital markets need revitalising. There are some really easy wins for the government to help do this and stabilise the market, with the potential for capital to return over the medium-term as the economic outlook improves.
Ahead of the Spring Statement on 26 March, we’ve identified three areas the government could commit to in order to restore confidence in AIM and improve sentiment of the companies listed there:
1. Long-term commitment
Firstly, the government should commit to maintaining the new tax position on AIM for at least a decade, as it has done with the enterprise investment scheme and venture capital trust market. Investors crave stability more than anything, so knowing the tax environment they are operating in will go a long way to ensuring AIM stocks remain competitive and attractive. As we saw in the run-up to last year’s Budget, any uncertainty will just freeze the market and suppress growth.
2. Clarification on SIPP holdings
At the same time as it announced changes to the taxation of AIM shares, the government brought pensions back into the estate for inheritance tax purposes. While these changes are consulted on, there is a real grey area where there is uncertainty if AIM shares held within a Self-Invested Personal Pension (SIPP) will receive the 50% business relief, or face being taxed at the 40% inheritance tax rate from 2027. We need clarity that AIM shares in a SIPP will qualify for the 50% business relief, as otherwise you create divergent investor outcomes. It may be cumbersome for HMRC to implement, but it needs to happen to ensure fairness and proper application of the rules.
3. Level playing field
The new tax regime ultimately disadvantages AIM shares compared to unlisted portfolios. Unlisted portfolios have maintained 100% business relief up to £1m, with that relief falling to 50% beyond that threshold. As a result, investors may shift their assets out of AIM and into unlisted portfolios to benefit from that higher relief. However, this creates a large amount of risk as these portfolios are often illiquid, lack transparency and expensive. The potential for customer harm, therefore, has increased while the playing field is uneven. While it is unlikely AIM shares will see any reversal of the business relief changes, it is important the government creates a fair and balanced investment environment that does not put investors at undue risk.
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