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The chief executive of investment bank Peel Hunt has warned of a looming “cliff edge” for UK small cap stocks if the government scraps inheritance tax relief on Aim-listed companies.
Currently, shares held on London’s junior Aim market are generally exempt from inheritance tax. But there are rising concerns in the City that chancellor Rachel Reeves may remove the tax break to help shore up the UK’s public finances at next month’s Budget.
Peel Hunt boss Steven Fine has written to the Financial Conduct Authority to warn that such a move would trigger a sell-off in the market that could wipe up to a third off its value.
He said financial advisers would feel compelled to tell their clients to sell smaller stocks if the tax break were removed, owing to “consumer duty” rules that are aimed at protecting individuals from foreseeable harm.
“This would put further selling pressure on Aim stocks,” he told the FT.
“I’ve made the FCA aware that the abolition of Aim tax relief could cause severe market distortions, especially if advisers feel compelled to withdraw clients’ money for fear of breaching consumer duty rules if they don’t. But this could be one of those rare cliff-edge moments for Aim stocks.”
He added that “some advisers have already told us that under consumer duty rules, they will feel duty-bound to tell clients to remove their money” if tax relief is removed, noting that Aim is already “an illiquid market”.
Dropping inheritance tax relief on Aim shares would raise £1.1bn in the current tax year, the Institute for Fiscal Studies has calculated. Aim stocks are exempt from the tax if they qualify for business property relief and are held at death for longer than two years.
But the Aim market is already suffering from a lack of flotations and a number of delistings in recent years, leading some analysts to warn that the removal of the tax break could be an existential threat.
The London Stock Exchange Group has warned that the number of companies on the junior market has fallen to 704, its lowest level in more than 20 years. There were 1,694 companies listed on the junior market in 2007.
Fine said the UK’s stock market more broadly was suffering from a dearth of flotations while companies are being taken off the exchange through mergers and acquisitions. Around 20 FTSE 350 companies had disappeared from the market this year alone, he added.
“While there will always be a replacement — so long as the UK still has 350 companies — it is clear that these indices are being hollowed out,” he said.
In a report last week, Barclays called for an overhaul of the way UK-listed companies are taxed to encourage investment, including tax reliefs for businesses that grow and shift from a junior exchange to the main market.
Peel Hunt estimates there is around £6bn in funds created for Aim stocks with inheritance tax relief, while individuals have about £5bn directly invested. Removing this money would be likely to lead share prices down by 20-30 per cent across the index, Peel Hunt added.
The FCA declined to comment. The Treasury said: “We do not comment on speculation around tax changes outside of fiscal events.”