Laith Khalaf, head of investment analysis at AJ Bell, comments: “The potential abolition of inheritance tax relief on AIM shares is one of the countless rumours swirling around ahead of Rachel Reeves’ maiden Budget. Currently much of the £70 billion AIM market can be passed on free of inheritance tax if the shares are held for at least two years before death. This incentive has created a significant industry dedicated to running AIM portfolios on behalf of those looking to protect their assets from tax. Beyond that there is no doubt some DIY investors holding AIM shares have been encouraged to do so by their inheritance tax treatment. The quid pro quo of course is London’s junior stock market gets extra funding as a result.
“Put simply, the abolition of inheritance tax relief would be a car crash for investors in AIM portfolios, and for the AIM market itself. There are also investors in smaller companies funds, investment trusts and VCTs who would be affected by such a move, despite not being eligible for an inheritance tax break. No-one knows precisely what the Budget will contain and it’s within the bounds of possibility the new chancellor will target the Business Property Relief rules which provide inheritance tax cover for AIM shares. However, there are three very compelling reasons to believe Rachel Reeves won’t tamper with the IHT relief currently afforded to the AIM market.
Reeves would invite a mini-Budget comparison
“Rachel Reeves will be extremely wary of creating a Truss-style run on a publicly quoted market. No-one knows precisely how much money is held in AIM shares purely for inheritance tax reasons, beyond the fact that it’s a substantial proportion. If the chancellor scraps inheritance tax relief, you can bet the immediate market reaction would be an over-reaction.
“A dramatic fall in the AIM market would be a very obvious negative response to the Budget which political opponents would gleefully seize upon. The Labour mantra that Liz Truss “crashed the economy” would be turned on its head, should Reeves precipitate a major fall in London’s junior stock market. For her maiden Budget, the chancellor would be openly inviting a comparison with the doomed mini-Budget of 2022. For this reason alone, it would be foolhardy for Rachel Reeves to target inheritance tax relief on AIM shares, and presumably her advisers are well aware of this. It’s one thing to introduce tax measures which will be judged in the fullness of time, possibly even after you leave office. It’s an entirely different ball game to enact policies where there is a live scoreboard in the form of a publicly quoted market.
Hitting AIM would undermine growth, growth, growth
“Undermining the AIM market would also run contrary to the chancellor’s stated goal of reinvigorating UK capital markets and growing the economy. In a speech only two weeks ago, the chancellor committed to building on the strong foundations of UK capital markets. Reports also suggest Reeves is planning to send a formal remit letter to the FCA which requires the regulator to promote the expansion of UK financial services. Labour has also promised to deliver the highest sustained growth in the G7. It would be a case of extreme cognitive dissonance to make all these claims while also taking an axe to one of the key pillars of UK capital markets and economic growth in the form of the London Stock Exchange.
Investors would be left frustrated and disenchanted
“Getting rid of IHT relief on AIM shares may also leave a lot of investors frustrated and disenchanted. This would of course include those who have invested in professionally managed AIM portfolios and DIY investors who hold AIM shares for their favourable inheritance tax treatment. Any withdrawal of inheritance tax relief would also result in falling share prices, so these investors would face a double body blow.
“It’s not just those who have been encouraged by the IHT rules to take greater investment risk by buying AIM shares directly who would be impacted either. Other investors would find their portfolios logged as collateral damage in any tax raid on AIM shares. A fall in the AIM market would have a knock-on effect on younger DIY investors who have invested in AIM shares for their growth potential rather than their IHT benefits. There are also investors in UK Smaller Companies funds and investment trusts which hold AIM shares that would be affected by a market fall. These funds and trusts account for around £17 billion of investors’ money and invest both in main market shares and AIM stocks. A smaller market for sure, but AIM VCTs would also be affected by any fallout in AIM stocks. So there will be a large constituency of peeved investors should Rachel Reeves abolish IHT relief on AIM shares, extending beyond those who hold them directly.
What does this mean for investors?
“There is no doubt the wait for this Budget, combined with the chancellor’s warnings about ‘difficult decisions’ has been deeply unhelpful for financial planning, and anyone simply looking to make sensible choices for themselves and their family. Whether it’s people pulling money out of their pension, selling profitable assets, or gifting money to heirs prematurely, some people have made irrevocable financial decisions which may prove to be sub-optimal, to say the very least.
“Those invested in AIM stocks to reduce their inheritance tax bill are caught between a rock and a hard place if they think the chancellor might target them. Selling out means incurring charges, possibly missing out on returns, and most importantly, resetting the two year waiting period for inheritance tax relief to kick in. Sticking it out raises the possibility of not only losing the favourable IHT treatment, but also seeing a sizeable decline in the value of their holdings. There are compelling reasons to believe inheritance tax relief on AIM shares will survive the Budget, but unfortunately with a new chancellor warning of short-term pain, ultimately anything is possible.”
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