Introduction

George Osborne's announcement at the Conservative Party Conference that a Tory government would abolish inheritance tax on estates worth less than £1m was very well received in many quarters. This was obviously tempered by the fact that, not being in government, the intention could not be put into action.  In fact, if you listened very carefully, it was possible to detect murmurings of appreciation of this from those with a vested interest in the AIM market.  However, relief was only temporary.....

The proposed changes

The measures announced by the Chancellor in his pre-budget report have dealt a double blow to AIM. Both the planned abolition of business asset taper relief and the planned effective increase in the threshold at which inheritance tax applies mean the withdrawal of significant incentives to invest in AIM companies.

Focusing on the business asset taper relief first, this relief reduces the gains made on sales of shares or securities, according to the length of the period of ownership. Currently shares in qualifying AIM companies (but not those on the main market) are classed as 'business' assets, which attract significantly higher rates of taper relief - these can reduce the effective rate of tax to 10 per cent. for a higher rate taxpayer after a holding period of two years.   However, under the government’s proposals, this taper relief will be abolished, to be replaced by a single rate of 18 per cent. which will apply to all disposals made on or after that date.

Moving on to the inheritance tax threshold, Mr Darling announced that the threshold at which inheritance tax was paid for couples would increase to £700,000 by 2010.  Many companies on AIM are trading groups; investment in such groups qualifies for a valuable 100 per cent. business property exemption from inheritance tax provided the investment is held for at least two years before a chargeable transfer for inheritance tax purposes is made.  It is commonly acknowledged that this exemption has had a significant impact in encouraging investment in AIM, as opposed to the main market or overseas markets. With the rise in the inheritance tax threshold reducing the need to search for tax-free investments, AIM companies could lose investors.

The future

It is important to remember that at this stage the changes have not yet been enacted, and it is possible in particular that some carve-outs will be made to the single 18 per cent. rate of capital gains tax through lobbying over the next few months.  However, the trend certainly isn't looking good for AIM from a tax point of view.  This, coupled with the 're-birth' of the PLUS Markets and the position of PLUS now as more of a threat to AIM, could have an adverse effect on the incredible rates of growth that the market has seen over the last few years.  Don't forget, however, that the recent tightening up of the relevant rulebooks for AIM (including the introduction of the new rulebook for nominated advisers) has served to steady the market and its reputation, and AIM has proved itself to be incredibly resilient throughout the recent market turmoil.