Business property relief on Aim shares will be limited to 50 per cent of the normal inheritance tax rate, chancellor Rachel Reeves has announced in today's Budget.
At present, 100 per cent of the value of an Aim portfolio is exempt from inheritance tax under BPR rules. Under the new rules, the portfolio is liable for tax, but at 20 per cent rather than 40 per cent..
Despite this, this afternoon the FTSE Aim All-Share index is up nearly 4 per cent while the FTSE is marginally down by 0.22 per cent.
But Abby Glennie, manager of the Abrdn UK Smaller Companies fund which has exposure to Aim stocks, said this optimism may be misplaced.
She said: “With tax benefits halved, investors will need to be more positive on return prospects to allocate cash to Aim and this could swing allocations towards other areas.
"UK smaller companies have been battered by a decade of difficulties – from the collapse of their natural investor base (UK pension funds) to increasing regulation – so now is the time to be looking at how we can support them, not pull the rug out from under them. Aim aligns with the rhetoric on investing in growth and innovation, and the tax cuts on inheritance tax here go against supporting external capital investment in this area."
Previously the returns from investing in an Aim stock could be modest as ownership saved 40 per cent in IHT. But with a tax liability now in place, the investment may have to perform better than some other asset classes to be attractive, according to Glennie.
Rachel Winter, a partner at Killick and Co, said: “Aim shares have suffered from a perfect storm in recent years. Brexit has damaged confidence in British companies, and higher interest rates have made investors more risk adverse and less willing to hold shares in smaller companies.
"The Aim index lost half its value between late 2021 and late 2023. There were some tentative signs of a recovery in 2024, but the index had been heading downhill again since Labour’s victory in the election due to fears that business relief would be removed. The index has rallied today on the news that Aim shares will attract an inheritance rate of 20 per cent rather than the usual 40 per cent."
HM Treasury, in its official statement, said the changes will impact around 0.3 per cent of all estates in the UK.
Ken Wotton, managing director, public equity at Gresham House said: "While we are disappointed with the reduction in business property relief, we view this as a buying opportunity, and our team will continue to seek high-quality, cash-generative businesses that are trading at attractive valuations. The long-term outlook for UK equities, particularly small caps, remains strong. M&A and private equity continue to accelerate, and in our view an eventual UK re-rating remains firmly on the horizon - we believe investors will look back at today as a good moment to invest.”
