It is the season for special pleading, meaning warnings to the chancellor of the dire consequences that will follow if she fiddles with various tax reliefs in her budget next month. In the case of London’s junior stock market – once known as the Alternative Investment Market, but these days just as Aim – the chorus is becoming deafening.
The “ongoing viability” of Aim would be threatened if 100% business relief from inheritance tax (IHT) is jettisoned, said Julia Hoggett, the chief executive of the London Stock Exchange, in a letter to the Treasury reported by Sky News. Stockbroker Peel Hunt thinks the likely initial share price reaction would be “a drop of 20%-30% across the [Aim] index”.
Are these forecasts credible and should we care?
The answer to the first question is yes. The entire capitalisation of Aim is about £75bn and roughly £11bn can be ascribed to investors who are making use of the current system that allows 100% relief from inheritance tax on shares held for at least two years. Approximately £6bn is held in IHT funds and about £5bn comes from direct investments by founders, families and individuals engaged in IHT planning.
It feels plausible that the bulk of that money would head to the exit if the relief was removed. One IHT fund manager says he would be “a forced seller on day one”. His fund, like others, is set up to deliver a tax relief to investors; if it cannot do that, he has a duty to get out. Given that liquidity on Aim isn’t strong under normal conditions, one can see how a rush would become a stampede. Selling would be “further amplified by other investors in Aim-listed companies recognising the negative fund flow and deciding to move into other investments,” argues Peel Hunt persuasively.
But should the rest of us really be bothered about the removal of a tax break that, as the Institute for Fiscal Studies points out, distorts investment choices and has no inherent rationale? Removal, estimates the thinktank, could raise about £1.1bn in year one for the Treasury, rising to £1.6bn in 2029–30. Every little helps if, like Rachel Reeves, you need to fill a claimed £22bn “black hole” and have ruled out changes to income tax, national insurance, VAT and corporation tax.
Actually, we probably should care. Aim’s reputation as a lightly regulated casino may be deserved given the number of scandals and collapses that have occurred since its launch in 1995 (think Patisserie Valerie for a recent example) but, equally, one shouldn’t forget about the hits. Fevertree, maker of tonics and mixers, listed a decade ago at a market capitalisation of £154m and is now worth £800m. Gamma Communications, a software and services business based in Newbury, has grown its market value tenfold to £1.6bn over a decade. Learning Technologies, a workplace digital learning firm, has increased its market value from £43m at listing a decade ago to £600m.
In practice, many such success stories could transfer to the main London stock market without difficulty. But there would also be a chunk of family-backed businesses that would become easy prey at sunken valuations for private equity, which doesn’t feel like an improvement. The point is that the end of Aim, or just a rapid descent into irrelevance, would cut off a source of funding for growing companies, which would jar with the government’s “growth first” and pro-risk-taking message. For all of Aim’s faults, companies have raised £135bn there since inception and there is a bias towards techie firms, which is usually deemed desirable.
None of which is to deny the illogicality of the tax break. The case for survival is only the pragmatic one that sudden removal would create a funding hole in the universe of small- and medium-sized companies. If the relief has to be reformed, Reeves could make the process gradual, for example, by extending the two-year qualifying period or retaining existing rights.
Nor is it to deny that Aim ain’t what it used to be – it had almost 1,700 companies in 2007 and now only 700 or so. But that is also an argument for not clobbering it further.