Threat to AIM tax benefits

Whilst since 2013 many AIM shares have been eligible for inclusion in ISAs (shielding them from both income and capital gains tax), for some investors the more useful aspect is they can also benefit from Business Property Relief after a two year holding period.

Why is this important? In a nutshell, AIM shares can fall outside a deceased’s estate meaning that for many years they have been an important tool for prudent inheritance tax (IHT) planning.

As a result, many household names in the investment world have set up IHT efficient portfolios comprising eligible AIM shares. There is also a raft of information online for DIY investors who run their own. This source of investment has been a real boon for AIM, particularly for the larger, better-established names which are seen as more “investible”.

Companies such as ASOS, Fever Tree and Advanced Medical Solutions are some of the names held by AIM-focussed investment houses. As indeed was Patisserie Valerie up until its demise last year. Given that share prices are ultimately driven by buyers and sellers this steady stream of demand has in my mind driven up the ratings of certain AIM shares higher than they otherwise might be.

Of course, if that ultimately results in a lower cost of capital for the underlying companies to invest in future growth (building warehouses, employing more people etc) then this should undoubtedly be seen as a good thing for the wider economy.

But it is wrong to assume that any favourable tax regime will last forever. Some of the more attractive elements of Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCT) were removed last year to focus on so-called “knowledge intensive” companies. More critically, with a General Election looming, any new incoming Government may not necessarily view the preservation of middle class wealth through mitigating death duty as a priority.

AIM investors should be aware that the Labour party clearly has reform of the IHT system firmly in its sights. Given their more recent rhetoric, it’s hard to see them looking very favourably on AIM.

Whilst many readers of this column may believe a Labour government to be something of a Black Swan event and, at the time of writing, YouGov were suggesting an 11-point lead for Boris Johnson, it is worth remembering 2017 and examining what impact a sudden and disorderly removal of IHT relief could have on the AIM market.

It won’t be good for anyone: Removing AIM shares’ eligibility for IHT relief would starve one of the key sources of demand. There are no readily available numbers on the value of AIM shares held within IHT portfolios, but I would be surprised if it weren’t measured in billions. With the tax benefits removed, it is unlikely wealth managers will buy into AIM to anything like the same extent as the last few years. This takes away a key prop of the market and will make it harder for companies to raise new capital for investment.

Larger companies are most exposed: Those companies that have benefitted most from IHT buying will arguably be most exposed. These tend to be the larger constituents whose ratings have done well out of being on AIM funds’ Buy lists. Whereas these shares tend to trade on lofty price earnings multiples now, this is likely to change as they lose their appeal.

The devil will be in the detail: It would be a question of law as to whether any change to the IHT treatment of AIM shares could be applied retrospectively. Would all the portfolios already invested in AIM retain that advantage?

In a worst case scenario, it could force funds to try and sell their AIM shares all at the same time with a natural impact on prices.

Liquidity isn’t one of AIM’s strong points. Where will the buyers come from?