Nightmare on Aim Street scares investors

The City of London is preparing for a “Halloween Nightmare on Aim Street”, which could be announced at the budget meeting next month. Investors have been scared by fears that Treasury may consider cutting an “essential” tax relief which has supported the Alternative Investment Market since its launch in 1995.

Quest, a brokerage firm that is part of Canaccord Genuity told its clients last week, “Such changes could send investors scrambling for small, illiquid stocks faster than you can shout ‘Boo !'”. It said: “Imagine Freddy Krueger slashing Aim’s share prices and leaving a trail behind him of financial carnage.” Quest’s 40 Aim Stocks most “at Risk” of the potential change include Atome, MTI Wireless Edge, and LBG Media.

In a letter leaked to Tulip SIDDIQ, City Minister, Dame Julia Hoggett of the London Stock Exchange issued an existential threat to the government last week.

Hoggett warned that the “fragility of Aim” was causing concern among companies and fund managers. She also said that the removal of business relief could “undermine the capital base of the market and bring its viability into doubt over the short-to-medium term”. Shares in Aim-listed companies that have been held by an individual for at least two years prior to death, and still be held when the person dies, are exempted from inheritance tax.

Aim, the index that hosts Fever-Tree and Jet2, as well as M&C Saatchi and M&C Saatchi has split opinion over the years. Supporters point to an index which supports small- and medium-sized companies, while detractors call it a “Wild West”, a “casino” with governance problems.

There are now fears that Aim may be dealt a fatal blow, at a moment when the government is reliant upon private sector investment to drive Britain’s economy and is trying to revive London capital markets which have seen a lack of floats.

Since May, when Labour won a landslide victory, the FTSE Aim All-Share Index has fallen by 8 percent, underperforming both the FTSE SmallCap and FTSE 350 indices.

Leading City figures are warning that the removal of tax relief will have a negative impact on the economy and investment. Nevertheless, some economists support the idea of re-evaluating tax breaks. The Institute for Fiscal Studies (a leading economic think-tank) has estimated that removing the relief would raise £1.1 billion for Treasury. This figure will rise to £1.6 billion by 2029-30.

IFS, in a study conducted in April to raise revenue by closing “loopholes” for inheritance tax, said that the special treatment given Aim shares “distorts the investment decisions of older people who are trying to minimize their inheritance tax liability”. The IFS said that its estimates could be underestimates “since trusts use business relief on Aim share very heavily, and for which there are no direct statistics available”.

The Resolution Foundation has argued this month that the exemption needs to be reform because it generates “distortionary behaviour” and provides “low value for the money”. The left-leaning Think tank stated that “owning Aim listed shares should no longer suffice as justification for not applying estate tax”.

Dan Neidle is another critic. He is a tax expert, and the founder of Tax Policy Associates, which has stated that the relief was “quite difficult to defend”. Recent reports in support of Aim’s tax break and Aim have been published.

Charles Hall, Head of Research at Peel Hunt City Investment Bank, in a report of 23 pages last week, said that the Aim index, despite its “understandably mixed” reputation, was “fundamentally significant for business creation, scaling-up funding and job creation”.

He estimated that removing the relief could result in a £1-billion or more reduction of tax revenue per year, “given capital losses, and the negative impact Aim and economic development”. In his AIMing Higher report, he stated that Aim inheritance funds were an important part the Aim “ecosystem” as they provided long term funding and primarily invested in UK focused companies.

Funds have invested more than £6billion in Aim shares and an additional £5billion is invested directly by individuals, families and founders who are doing tax planning. “Up until recently, Aim companies received about £500,000,000 per year in new money into IHT funds. This was a major source of capital. The money has dried up because of the poor performance of UK-based companies and, more recently, due to concern over the future IHT relief.

Octopus Investments, which is invested via Octopus Aim, Inheritance tax service, in a portfolio companies listed on this index. Fevertree also ranks among the top ten Aim companies Jessica Franks said, “Aim never existed without Business Relief, so concerns about its removal are understandable.”

She said: “The savings that are often quoted as a result of the removal of the business relief is significantly overstated. It does not account for the negative impact the UK productivity or other planning options that investors should seek.” Grant Thornton, in a report commissioned by London Stock Exchange, and cited by Hoggett in his letter to Siddiq said that Aim contributed £35.7billion of gross value to the UK GDP last year, supported directly more than 410,000 job and its constituent companies contributed £5.4billion of corporation tax.

Accounting firm Aim added that Aim firms were “generally more efficient than the national average”, outperformed private companies in fundraising, and generated four times their revenue through overseas exports. When asked about possible changes, a City investment bank’s chief executive said that the long delay until the budget created a “potential cliff edge of 20-30%” for Aim shares.

The London Stock Exchange chief executive, Dame Julia Hoggett has warned about the “fragility of Aim Why would you buy Aim shares today, if they were going to eliminate inheritance tax relief in the budget? The government was warned of “unintended effects”. The UK drains money from the market. We are very good at investing in venture capital. We are very good at early stage [investing]. We lose these companies to other jurisdictions. “This is not going help.”

Gervais William, another City veteran and head of equity at Premier Miton Group Asset Manager, said about the policy: “It has kept the Aim Market alive in recent years.” I don’t believe we’d still have an Aim Market without it. Fintel is one of the 704 companies on Aim. It’s a fintech company based in Huddersfield that provides support services to the retail financial sector. The company has a value of approximately £271million and its investors include Octopus.

Neil Stevens said, Fintel’s co-chief executive, that the removal of the tax break “would destroy the ability to grow and innovate companies”, and that the uncertainty surrounding the policy is causing “a lot of panic”. “Investment managers sell to generate liquidity in case they receive redemption requests. Clarity is all we need. The people are second-guessing. It’s doing a lot of damage.”

He said that, if the government cannot “give specifics”, about fiscal policy before the budget, they should at least change their rhetoric which “generally spells doom for business and damages confidence”.

A Treasury spokesman, who is working to revitalize the UK capital markets through reforms such as pensions, stated: “We don’t comment on speculation about tax changes other than fiscal events.”