Inheritance tax grab on London’s junior AIM could cost Reeves £1bn

Rachel Reeves’ inheritance tax hike on London’s junior market AIM in the Budget is likely to cost more than a billion in revenue for the Treasury, investment bank Peel Hunt has warned.

The government had estimated that it would raise £92.5m from its 50 per cent inheritance levy on AIM stocks, based on calculations from the 2021/22 tax year.

“However, the problem is that AIM shares will be excluded from the £1m allowance that is provided to farms, family businesses and private businesses,” said Charles Hall, Peel Hunt’s head of research.

While Hall said the rationale “makes sense” as these assets are handed down to the next generations, the inclusion of private investments means that they will be prioritised for new investments over going into the junior market.

Meanwhile, “owners of existing AIM investments have an incentive to switch to private in order to save up to £200,000 in inheritance tax,” leaving wealth managers and independent financial advisers (IFAs) prioritising private investment for new inheritance tax-focused funds.

As a result, Peel Hunt forecast that more than £600m will be pulled from AIM every year, with new money flowing into the junior market for inheritance tax purposes “very limited”.

“There will be a clear incentive for IFAs to move the existing £6bn of AIM inheritance tax funds into private vehicles,” added Hall. “We understand that IFAs are already recommending this due to the negative perception of AIM from the budget changes.”

With billions flowing out of the market, this will cause a knock-on effect on AIM stock valuations, which are already suffering a multi-year low in IPO activity and an unprecedented wave of exits.

This could also lead to the closure of other AIM-focused funds or the pull-away of investors, the investment bank warned, such as the recent closure of the Miton UK Microcap trust.

“If market conditions were more robust, there would be less of an issue,” said Hall. “Unfortunately, conditions are far from robust.”

Thanks to rumours of the imposition of a full inheritance tax penalty on AIM shares before the Budget, the market has performed poorly since the new government was elected.

The junior market has underperformed the UK smaller company sector by around 10 per cent since June, with a loss of around £7bn in market value.

As a result, Peel Hunt urged the government to review the £1m allowance to consider including AIM companies, in a bid to keep what little capital was left in the junior market.

In addition, it argued that the new rate of capital gains tax, which is set to be hiked from 20 per cent to 24 per cent, added an additional headwind to the junior market, and should be cut to around 10 per cent for AIM stocks.