AIM Shares Rally Following Inheritance Tax Relief Decision
In recent weeks, shares of companies trading on the Alternative Investment Market (AIM) have experienced a significant rally, buoyed by the Chancellor’s decision to halve the rate of inheritance tax (IHT) relief instead of abolishing it altogether. This adjustment means that the effective rate of IHT on shares held for longer than two years will be set at 20%. The Chancellor’s move has thus reshaped perceptions of AIM investments, providing a much-needed boost to the market’s value.
Context of Market Performance
Prior to the announcement, expectations that the relief would be completely scrapped had catalyzed a pronounced sell-off in AIM shares. This decline was highlighted by a 7% drop in the AIM All-Share index since the July general election, contrasting sharply with the performance of more established indices. The FTSE All-Share index had remained flat, while the FTSE Small Cap index even posted a modest 1% gain during the same period. Investors were clearly on edge, fearing the potential repercussions of changes to IHT relief.
Historical Significance of IHT Relief
The inheritance tax relief on AIM shares has been a critical component of the market’s appeal since its introduction in 1996. According to broker Peel Hunt, the potential abolition of this relief could have led to a “material loss” in shareholder value, with estimates suggesting that AIM shares might plummet by 20-30%. This would represent a staggering destruction of value, estimated between £14 billion and £21 billion. The fear that such a drastic measure could be implemented was at the forefront of investor anxieties.
Positive Response to the Relief Retention
The Chancellor’s decision to retain 50% relief instead of scrapping it has been received positively by the market. Following the announcement, the AIM index rallied by 4%. Notably, several individual stocks saw impressive gains; software company Craneware (CRW) rose by 24%, cybersecurity firm GB Group (GBG) climbed 11%, and flooring manufacturer James Halstead (JHD) increased by 8%. This rally indicates a renewed confidence among investors in AIM’s growth potential.
Insights from Market Leaders
Clifford Gross, CEO of Tekcapital, a company investing in university spin-outs, remarked that fears regarding the fate of AIM had been “overblown.” This sentiment was echoed by Amisha Chohan, head of small-cap strategy at Quilter Cheviot, who suggested that with “this hurdle now mostly cleared, and interest rates beginning to fall,” the landscape appears promising for smaller companies seeking to attract investment.
Cautions in the Midst of Optimism
However, despite the optimistic outlook, some experts warn that the halving of IHT relief still renders investing in AIM shares less attractive relative to previous conditions. Abby Glennie, manager of Abrdn’s UK Smaller Companies Fund, pointed out that while the government didn’t “throw in the hand grenade,” the reduced relief might deter some investors. Furthermore, James Ashton, CEO of the Quoted Companies Alliance, cautioned that this change would not reverse the trend of recent outflows from AIM investments. He also noted that other fiscal measures, such as the potential increase in capital gains tax and the freezing of ISA limits for five years, could continue to dampen the investment appetite for AIM stocks.
Conclusion
In conclusion, the Chancellor’s decision to halve the rate of inheritance tax relief on AIM shares has sparked a notable rally in the market, alleviating fears of a complete abolition. While this move provides hope for the continued growth of smaller companies, investors remain cautious, reflecting on the broader economic landscape and government fiscal policies that may affect future investment decisions. The AIM market, albeit with headwinds, is poised for a potential resurgence, but vigilance is required as investors navigate the evolving financial terrain.
