Axing tax breaks for AIM shares in Budget ‘will depart small UK companies susceptible to takeover’

Rumoured plans to axe a lucrative tax break could leave more companies vulnerable to takeover, further diminishing London’s shrinking small-cap market, experts have warned.

London’s junior AIM market has increasingly struggled against weak liquidity and undervaluation in recent years, driving a near collapse in new listings and more companies exiting the market.

And investor confidence in the market has worsened on reports that Chancellor Rachel Reeves will bring an end to an arrangement that allows most AIM stocks held for at least two years to be excluded from inheritance tax.

Reeves is said to be considering a a cut to business rates relief for AIM stocks, stripping inheritance tax benefit driving up to 15% of the market’s liquidity 

Reeves is said to be cutting business property relief for AIM stocks.

Prominent firms including mixer maker Fevertree, travel firm Jet2 and Mothercare recently wrote to the Chancellor, urging ‘clear support’ for business relief on inheritance tax.

Richard Bullas, co-head of UK equities, small and mid-cap, at Martin Currie, told This is Money: ‘The Government really has to tread this line very carefully. They tell us they are a pro-growth, pro-business Government, and if you want growth, you need investment.

‘No one’s buying any shares because of uncertainty around the tax implications.

‘But of course you have some fantastic companies based AIM that are trading on very low multiples that eventually will be attractive to somebody.

‘We do think if the tax break is taken away some of the businesses will be vulnerable to other source of capital taking advantage of the low valuations.’

London Stock Exchange Group says AIM is ‘the world’s most successful and established market for dynamic high-growth companies’, which benefit from access to ‘a diverse set of investors and a supportive advisory community, who understand the needs of entrepreneurial businesses’.

But a lack of liquidity on the market has contributed to lacklustre share price growth for many AIM-listed companies, as well as outsized price swings in response to company updates.

This has meant fewer small businesses opting to list on the market and more being taken private, driving the number on companies on the AIM index to its lowest level in more than 20 years, according to a accountancy group UHY Hacker Young.

A separate report from New Financial shows that more smaller listed companies left the UK stock market than joined it in seven of the past ten years. 

Colin Wright, chairman of UHY Hacker Young, said: ‘As AIM experiences a further glut of companies leaving the exchange, the government needs to urgently address how it can help. 

‘Cutting IHT relief on AIM shares would do the opposite,’

It follows warnings from broker Peel Hunt that shares could fall as much as 25 per cent should Chancellor Rachel Reeves decide to cut AIM IHT relief. 

Around 15 per cent of AIM liquidity comes from IHT fund solutions, according to UK managing director at Oakglen Wealth Dominic Tayler.

He said: ‘If business relief goes this does not just impact those who can afford to invest but everyone else associated with small companies within the private sector, which cannot rely on private equity funds or Government grants.’

Abrdn data shows UK smaller companies are now the joint ‘cheapest’ in the world alongside European peers, despite outperforming global counterparts since the start of the year and boasting returns nearly 50 per cent higher than the wider UK market over 25 years. 

The Government is also said to be mulling an increase in capital gains tax and employers’ national insurance contributions. 

Bullas said policy uncertainty has been a cloud over UK businesses and consumers, who ‘will feel a lot better once they know what the Government is planning’, and are well placed for growth once it has cleared.

He added: ‘Business will respond. Businesses are dynamic.

‘If it’s an increase in national insurance, for example – yes that is a tax they will have to fund at the end of the day, but businesses have dealt with change because that’s what they do.

‘We’ve had five years of a very difficult backdrop and businesses have responded really well through that period, which is underappreciated by many investors.

‘When the clouds start to clear, we will have a tailwind and companies will accelerate out of this downturn in great shape with opportunities to capitalise on.’