General election pledges could spook the alternative investment market

03 October 2023
One of the most generous tax reliefs in the UK is business relief (BR), which can provide up to 100% relief from inheritance tax (IHT) on assets that qualify for it. It can apply to various kinds of business assets, a common one being shares in most unquoted trading companies. 

There are good reasons why BR exists, in particular it helps to ensure that the majority of trading companies are not impacted by the death of a shareholder. In the absence of the relief, an IHT liability of up to 40% of the value of the shares could arise on the death of the shareholder. 

The absence of BR could sound the death knell for family businesses, making it harder for businesses to pass from one generation to another. Depending on the amounts involved, that could require the shares to be sold to a third party to fund the tax bill, borrowing funds, or potentially involve liquidating the company’s assets to help meet an inheritance tax bill.

However, for BR purposes, unquoted shares is taken to mean ‘not listed on a recognised stock exchange’. Shares traded on the alternative investment market (AIM) are considered to meet the definition of unquoted and can therefore potentially qualify for BR. 

The companies listed on AIM are generally smaller than those listed on recognised stock exchanges and can carry more risk as a result. Illustrating the point, the FTSE AIM All-share Index has fallen by around 12% in the year to 1 October 2023. For many AIM-listed companies, the potential availability of BR provides important support to attract and retain investors.

However, if BR were to be abolished then AIM-listed companies are unlikely to face the same challenges if a shareholder died as a family company would. Some therefore question whether AIM shares should benefit from BR.

With rumours circulating that the prime minister is considering scrapping IHT and that the shadow chancellor is considering including a pledge to scrap BR in Labour’s general election manifesto, the prospects for AIM look bleak.

As it stands, both of the major political parties could introduce policies that cut the legs off AIM. If rumours turn into reality, the publication of political manifestos could send the market into a tailspin as demand for shares reduces. Investing into a portfolio of AIM shares is a common investment strategy with a number of investment firms. However, we could start to see investment advisers and those already invested reassessing whether the IHT benefits it can offer outweigh the potential price threat posed by general election pledges.