Prior to the Autumn Budget, there was widespread speculation that business relief for investment in the AIM market may be scrapped altogether. In the event, the relief remained in place, albeit at a planned reduced rate. The initial euphoria among AIM investors immediately after the Autumn Budget was announced has since evaporated due to concerns about the uneven playing field the change has created.
Farmers and private businesses will receive a million-pound allowance under business relief or agricultural relief. This means the first million pounds of the value of a business or farm is tax-free, and anything above that is effectively subject to 20% tax. While qualifying investments in AIM shares were previously eligible for up to 100% business relief for inheritance tax purposes, AIM has not been given this million-pound allowance, so everything invested in AIM will be subject to 50% relief (therefore an effective tax rate of 20%) after two years, starting in April 2026.
There is a suggestion that the Treasury may have made a mistake by not giving the same million-pound relief to all asset classes, because it could lead people to invest more in private businesses, rather than encourage investment in small, publicly traded companies on the AIM market. Some providers operate schemes whereby private companies get business relief with modest returns, usually around 3%, but with minimal risk. The change in legislation to cap business relief for qualifying AIM investments to 50% could discourage investment in AIM in favour of the schemes investing in private companies – arguably going against the spirit of the original legislation, which the government set up to encourage investment in higher risk, fledgling companies.
Reactions in the industry to the proposed reduction in AIM tax relief have been mixed. While the overall sentiment is not as positive as initially thought, a tax saving is still deemed better than nothing, so there remains an incentive to invest in AIM. A number of advisors even suggest they will refer more AIM business if the changes go through as announced in the Budget.
There are other factors affecting the AIM market. While the Autumn Budget increase in the minimum wage was expected and accepted by most companies, the increase in National Insurance contributions by employers was something of a curveball. It is particularly negative for AIM businesses employing lower-skilled labour, because it increases their costs – potentially leading to higher prices and reduced profits. Another issue is the so-called forthcoming ‘Trump tariffs’ on US imports from the new president following the US election.
Positive signs for AIM do exist: interest rates are expected to fall further, which should be positive for smaller companies, including those on AIM. Investors hope to see a pickup in performance, as saving tax is more attractive if the investment performs well. The quality of investments and the ability to adapt to market conditions are crucial – and smaller companies can have better pricing power and flexibility as they are more fleet of foot.
So, what next? The legislation details are yet to be formalised in a future finance act, so the current proposals are not yet set in stone. The Treasury is in the process of consulting with interested parties, and there may be tweaks to the planned changes as a result.
Ultimately, the Autumn Budget changes to inheritance tax are unlikely to generate significant revenue for the Treasury. They will however mean that more people will be affected by inheritance tax due to increasing house prices and an unchanged threshold for inheritance tax liability. Even with the planned reduction in business relief, investment in an AIM IHT portfolio service remains a good option to try to mitigate against inheritance tax.
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