Raising inheritance tax on AIM shares will CUT Treasury revenues by £2.2bn analysts claim

Autumn Budget changes to inheritance tax charged on investments in small UK firms could result in Treasury revenues shrinking by £2.2billion a year, analysts have warned.

Chancellor Rachel Reeves last month revealed a shake-up of IHT, which will see a freeze on the nil-rate band at £325,000 until 2030 and pensions brought under taxation from 2027, as well changes to agricultural and business property relief.

Investments in AIM stocks were fully exempt from IHT of 40 per cent, but from April 2026 this will change to 50 per cent BPR relief – equating to a 20 per cent IHT charge, versus zero previously.

HMRC says this will see the tax cost to the Treasury fall from £185million per year to £92.5million.

But research from broker Peel Hunt suggests an imbalance between IHT charged on private assets versus stocks in the Britain’s junior stock market could hammer the Treasury’s tax take.

Peel Hunt said: ‘The problem is that AIM shares will be excluded from the £1million allowance that is provided to farms, family businesses and private businesses.

‘The result is that qualifying private investments are included in the £1million allowance whereas AIM companies are not.

‘The consequence will be that private businesses are prioritised for new investments, and owners of existing AIM investments have an incentive to switch to private in order to save up to £200,000 in IHT.’

Consequently, the broker thinks an exodus from AIM stocks in favour of private investments, as well as a lack of incentive for new allocations, will cost the Treasury £2.2billion by the 2026/2027 tax year.

London’s AIM market has been depressed for some time, with investors and management frustrated with an absence of share price momentum, poor liquidity and weak trading volumes.

New listings on the exchange have become increasingly rare, while a number of companies have left the exchange.

There was some relief for AIM investors when the Chancellor stopped short of removing IHT relief entirely.

Downbeat: The AIM market has struggled to raise cash in recent years 

But Peel Hunt said even Reeves’ more limited changes to IHT relief will have unintended consequences for the index and the Treasury’s tax take.

The analysts said: ‘We expect the Budget changes to result in a surge of funds into private vehicles, particularly given the changes to pension tax.

‘These vehicles generally aim to deliver a consistent return (c.3 per cent) and focus on capital preservation, which provides an added attraction now the tax relief has been reduced.

‘This is highly likely to store up future problems given the lack of liquidity in most of these vehicles, which already have c.£10billionn of [assets under management].’

Peel Hunt added the Government should review the exclusion of AIM investment from the £1million BPR allowance, confirm that the 50 per cent BPR allowance will be retained indefinitely, and provide guidance on whether AIM stocks held in pensions are able to receive the 50 per cent relief’.

Peel Hunt thinks the IHT changes could cost the Treasury £2.2billion by 2026/27 

The broker also thinks the Government should reduce the level of capital gains tax on AIM to ‘stimulate investment into AIM and increase the tax take’, while looking at ways to accelerate investment in AIM through the British Business Bank and the Business Growth Fund.

Peel Hunt said: ‘If we want AIM to survive and thrive, it is essential that capital is attracted and the market performs.

‘The good news is that there are plenty of high-quality growth companies listed on AIM, so it is the demand side that is the issue.

‘We urge the government to review the £1million allowance to consider including AIM companies. This should ensure that capital remains on AIM rather than flowing into private assets. We believe the unintended consequences are substantial if this is not addressed.’

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