Investors flee small companies over inheritance tax fears

Fears of an inheritance tax (IHT) raid in the budget have led to a near-£6 billion crash in the value of Britain’s Aim stock market for smaller companies as investors have rushed to ditch their shares.
In a tax break designed to encourage people to invest in small firms, Aim shares are exempt from inheritance tax as long as the owner has held them for two years before they die.
But chancellor Rachel Reeves is widely thought to be planning to reduce or even scrap the perk altogether in Wednesday’s budget.
The Aim index has fallen 11.5 per cent since the election, a decline of £5.9 billion in the value of the firms listed on it. In the same period, the FTSE 100 index of the biggest companies has been flat, while the FTSE 250 is down 4.2 per cent.
Simon French, chief economist at broker Panmure Liberum, said the feared change to IHT on Aim shares had already forced down prices in the junior market, set up in 1995 to let smaller companies list their shares under less onerous rules than those set by the main market on the London Stock Exchange.
There are also warnings that an increase in the highest rate of capital gains tax will deter entrepreneurs, who will face paying more tax when they sell their shares, and discourage investors in their companies.
Ben Thompson, deputy chief executive of the Aim-listed Mortgage Advice Bureau, said: “Any tax raid by the government on Aim could stifle investment in some of the UK’s most entrepreneurial companies”.
Tim Warrillow, founder and chief executive of Aim-listed drinks brand Fever-Tree, said that while his investors had stuck with the company, “there is no question that the lack of clarity around the government’s plans on IHT relief is undermining confidence in Aim — the very business and investor confidence that they have been at pains to assure us they were setting out to restore.”
Ami Daniel, founder of shipping software business Windward, also listed on Aim, said he knew of people who were selling shares or preparing to do so. The potential tax changes had thrown Aim “off the rails”, said Daniel, adding that he had heard entrepreneurs and wealthy people discussing taking their money out of the UK.
Charles Hall, head of research at broker Peel Hunt, said shares on Aim had fallen more rapidly than larger stocks, showing that “this was largely due to the inheritance tax concerns”.
Reeves has also been warned by non-doms — those who do not pay tax on their foreign wealth — that her reforms will cause an exodus of wealthy people who now face unexpected IHT bills.
Another tax relief in the firing line is the ability for entrepreneurs to pay capital gains tax at a 10 per cent rate on the first £1 million of gains. This was cut from £10 million by the last Conservative government, but a survey by an influential group of entrepreneurs has found that if this was raised again, it would encourage them to expand. According to a survey of 400 business owners by entrepreneur group Helm, 50 per cent would hire more staff if the relief was increased.
With just days before the budget, other industries are stepping up their warnings about the impact of potential tax rises. An inflation-busting increase in air passenger duty (APD) would erode Britain’s competition position, according to a former British Airways boss. “The British government must understand that it is in a global race for aviation investment,” said Willie Walsh, who is chair of industry lobby group the International Air Transport Association.
The Scotch Whisky Association, meanwhile, has warned against further rises in alcohol duty after then chancellor Jeremy Hunt imposed a 10.1 per cent rise last year.
A Treasury spokeswoman said: “We’re committed to supporting businesses, including Scotch whisky producers, through capping corporation tax at 25 per cent and publishing a business tax roadmap so that future investments can be planned with confidence.
“We do not comment on speculation around tax changes outside of fiscal events.”