Investors spooked by threat of Nightmare on Aim Street

Instead of the London Stock Exchange’s junior market looking forward to celebrating its 30th birthday next year, the City is braced for the threat of a Halloween “Nightmare on Aim Street” at next month’s budget.
In the run-up to Labour’s first budget in almost 15 years — to be delivered the day before Halloween — investors have been spooked by concerns that the Treasury is considering cutting a “vital” tax relief that has underpinned the Alternative Investment Market (Aim) since shortly after it was launched in 1995.
As Quest, part of the brokerage Canaccord Genuity, told clients last week when screening for 40 of the most exposed stocks, such changes “could send investors scrambling to dump small and illiquid shares faster than you can say ‘Boo!’”.
It added: “Picture Freddy Krueger slashing through Aim share prices, leaving a trail of financial carnage in his wake.”
Quest’s 40 Aim stocks most “at risk” to the potential changes — those that have been “riding high on momentum but lack solid valuation support” — include the fertiliser company Atome, MTI Wireless Edge and LBG Media.
Dame Julia Hoggett, the London Stock Exchange’s chief executive, last week also issued an existential warning to the government in a leaked letter to Tulip Siddiq, the City minister.
Hoggett, chairwoman of the Capital Markets Industry Taskforce, warned that companies and fund managers were concerned at the “fragility” of Aim and said that removing business relief risked “undermining the market’s capital base and bringing its viability into question over the short to medium term”.
Under the business property relief regime, shares in companies listed on Aim, if held for more than two years before an individual’s death and are still held at death, are exempt from inheritance tax.
Over the years Aim, which hosts companies including Fever-Tree, Jet2 and M&C Saatchi, has divided opinion, with backers pointing to an index that supports small and medium-sized growth companies while detractors see an “Aim casino” and “Wild West” mired in governance fiascos.
Now there are fears Aim could be dealt a lethal blow at a time when the new government is reliant on private sector investment for Britain’s economic growth and is attempting to revive London’s capital markets, which have suffered a dearth of floats, outflows and delistings.
Since May, before Labour swept to a landslide, shares in the FTSE Aim All-Share index have fallen 8 per cent, underperforming the larger FTSE SmallCap index and FTSE 350 index.
Ahead of the budget on October 30, warnings from leading City figures over the impact of scrapping the relief on investment and the wider economy are mounting.
Some leading economists are supportive of overhauling the tax break, however.
The Institute for Fiscal Studies, a leading economic think tank, has estimated that abolishing the relief could raise £1.1 billion for the Treasury, rising to £1.6 billion in 2029–30.
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In research in April on raising revenue from closing inheritance tax “loopholes”, the IFS said the special treatment of Aim shares “distorts investment choices towards these types of shares, particularly for older people seeking to minimise their inheritance tax liability”.
Its estimates, the IFS added, could be an underestimate “since business relief on Aim shares is used very heavily by trusts, for which no direct statistics are available”.
This month, the Resolution Foundation argued that the exemption should be reformed as it generated “distortionary” behaviour and provided “low value for money”.
The left-leaning think tank said “owning Aim-listed shares should no longer be sufficient justification for not applying inheritance tax”.
Another critic is Dan Neidle, a tax expert and founder of the Tax Policy Associates think tank, who has said that the relief is “quite hard to defend”.
Two reports have been issued recently in defence of Aim and the tax break.
Charles Hall, head of research at Peel Hunt, the City investment bank, in a 23-page report last week, argued that despite Aim’s “understandably mixed reputation given its track record”, the index was “fundamentally important to business creation, scale-up funding, job creation and economic growth”.
Removing the relief has the potential for a £1 billion-plus per year reduction in the tax take, he estimated, “given the level of capital losses and the negative impact on Aim and economic growth”.
In his report AIMing Higher, he said that specific Aim inheritance tax funds had become an important part of the Aim “ecosystem” as they provided long-term funding and predominantly invest in UK-focused companies.
The funds have more than £6 billion invested in Aim stocks and a further £5 billion-plus is directly invested by the likes of founders, families and individuals doing tax planning.
“Until recently, there was about £500 million per annum of new money going into IHT funds, which was an important source of new capital for Aim companies. This has dried up due to the overall performance of UK companies, and more recently due to concerns over the future of IHT relief,” he told clients.
The firms include Octopus Investments which, via Octopus Aim Inheritance Tax Service, is invested in a portfolio of companies listed on the index.
Jessica Franks, head of investment products at Octopus Investments, said: “Aim has never existed without business relief, so concern around the impact of its removal is understandable.”
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She added: “The potential savings often quoted resulting from the abolition of business relief are significantly overstated, not accounting for the negative impact on UK productivity nor other planning options investors should be expected to seek out.”
In another report, commissioned by the London Stock Exchange and cited in Hoggett’s letter to Siddiq, Grant Thornton said Aim last year contributed £35.7 billion of gross value added to UK GDP, directly supported more than 410,000 jobs and that its constituent companies made a corporation tax contribution of £5.4 billion.
The accounting firm added that Aim companies were “generally more productive than the national average”; significantly outperformed private entities in fundraising; and had generated four times as much of their revenue from overseas exports.
Contacted about the possible changes, the chief executive of one City investment bank said the long wait until the budget had created an “estimated 20 to 30 per cent potential cliff edge” on Aim shares.
“Why on earth would you go and buy an Aim stock today if you think they’re going to remove inheritance tax relief on it in the budget?”
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They warned the government of “unintended consequences”.
“The UK is just draining funds out of the markets. We’re very good at venture [capital investing]. We’re very good at seed [early stage investing]. And then we lose these great companies to other jurisdictions. Well, this is not going to help that.”
Another City veteran, Gervais Williams, head of equities at Premier Miton Group, the asset manager, said of the policy: “It’s kept the Aim market alive over recent years. I don’t think we’d have an Aim market without it.”
Among the 704 companies listed on Aim is Fintel, the Huddersfield-based fintech and support services company to the retail financial services sector, which has a market value of about £271 million and whose investors include Octopus.
Neil Stevens, Fintel’s joint chief executive, said that removing the tax break would “destroy the ability to innovate and grow companies” and that uncertainty over the policy was causing a “lot of panic”.
“Investment managers are selling just in case they get redemption requests so they are having to create liquidity. We just need to give clarity. People are second guessing. It’s causing lots of damage.”
He added that if the government can’t “give specifics” about fiscal policy ahead of the budget they could at least change the rhetoric, which “generally is doom and damaging business confidence”.
A spokesman for the Treasury, which is seeking to reinvigorate the UK’s capital markets, such as through pensions reform, said: “We do not comment on speculation around tax changes outside of fiscal events.”