Removal of tax breaks for AIM shares in Budget ‘will leave UK small businesses vulnerable to takeovers’

Rumors about plans to scrap a lucrative tax break could leave more companies vulnerable to takeovers, further diminishing London’s shrinking small-cap market, experts have warned.

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

And investor confidence in the market has worsened following reports that Chancellor Rachel Reeves will end a deal that allows most AIM shares held for at least two years to be excluded from inheritance tax.

Reeves is said to be cutting corporate ownership relief for AIM shares.

Prominent businesses including mixer maker Fevertree, travel company Jet2 and Mothercare recently wrote to the Chancellor, urging “clear support” for corporate relief on inheritance tax.

Richard Bullas, co-head of UK small and mid-cap equities at Martin Currie, told This is Money: “The government really needs to tread very carefully here. They tell us that they are a government that favors growth and business, and that if you want growth, you need investment.

‘No one is buying shares because of uncertainty over tax implications.

‘But of course there are some fantastic AIM-based companies trading at very low multiples that will eventually prove attractive to someone.

“We believe that if the tax exemption is removed, some of the companies will be vulnerable to other sources of capital taking advantage of low valuations.”

London Stock Exchange Group claims that AIM is “the world’s most successful and established marketplace for dynamic, high-growth companies”, which benefit from access to “a diverse set of investors and a supportive advisory community, which understands the needs of companies.” entrepreneurs.”

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

This has meant fewer small companies choosing to list on the market and more companies going private, pushing the number of companies in the AIM index to its lowest level in more than 20 years, according to accounting group UHY Hacker. Young.

An independent report by New Financial shows that in seven of the last ten years more small listed companies left the UK stock market than joined it.

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

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

This follows warnings from broker Peel Hunt that shares could fall by up to 25 per cent if chancellor Rachel Reeves decides to cut AIM IHT relief.

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

He said: “If business relief is removed, this will not only affect those who can afford to invest, but everyone else associated with small businesses within the private sector, who cannot rely on private equity funding or government grants. “.

Abrdn data shows the UK’s smallest companies are now the “cheapest” in the world alongside their European peers, despite outperforming their global counterparts since the start of the year and boasting returns of almost 50 per cent. higher than the broader UK market for 25 years.

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

Bullas said political uncertainty has been a cloud over UK businesses and consumers, who “will feel much better once they know what the Government is planning” and will be well positioned for growth once it has dissipated. .

And he added: ‘Companies will respond. Companies are dynamic.

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

‘We have had five years of a very difficult context and companies have responded very well during that period, which many investors underestimate.

“When the clouds begin to clear, we will have a tailwind and companies will emerge from this crisis in great shape and with opportunities to seize.”