Assessing the Value of AIM Investment Post-IHT Restrictions

Assessing the Value of AIM Investment Post-IHT Restrictions

Beginning April 2026, shares traded on the Alternative Investment Market (AIM) will fall within the scope of inheritance tax (IHT), potentially casting doubt on the market's merit given the associated risks.

Historically, smaller companies listed on AIM have offered high-growth possibilities, although not every venture is destined for success. Compared to the main market, AIM is generally characterized by lower liquidity and higher volatility. Up until now, investors in AIM shares have benefited from business property relief, which exempted IHT when the original owner had owned the shares for at least two years. This incentive has been instrumental in attracting investors, but from April 2026, this relief will be halved from 100% to 50%. Consequently, families will pay IHT at a reduced rate of 20%, half the full 40% rate.

"Investing in such businesses, given their fledgling nature, is a risk that some investors may have been willing to take due to IHT exemptions on such portfolios," said Susannah Streeter, head of money and markets at Hargreaves Lansdown. She expressed concern that this minor change could lead to significant repercussions when fostering an environment suitable for entrepreneurial businesses, which may contradict the chancellor's growth agenda.

In recent years, AIM shares have encountered difficulties. Over the past five years, the FTSE AIM 100 has shed almost 20% (as of market close on 17 April), while the FTSE 100 has increased almost 38% over the same period. The junior market has also suffered an exodus of companies thanks to takeovers and those moving to the main market.

"The total number of companies on AIM at the end of 2024 hit the lowest level since the end of 2001 at 688 stocks, a significant decrease from the 1,700 seen at its peak in 2007," said Dan Coatsworth, investment analyst at AJ Bell.

Despite the change, AIM shares will still provide an IHT break, even once the new rules come into effect in April 2026. Nevertheless, whether this proposition remains attractive will rely on tax position and risk tolerance. Those with a smaller estate may not need to explore methods for minimizing IHT liability, as IHT is only due once tax-free allowances have been exhausted.

Every individual is entitled to pass on up to £325,000 tax-free (known as the nil-rate band). Additional allowances may apply for direct descendants. Married couples and civil partners can pool their nil-rate bands, theoretically allowing an estate valued up to £1 million to be passed tax-free (£325,000 + £175,000 + £325,000 + £175,000). If an estate does not exceed these thresholds today and is unlikely to by the time the owner passes away, there is no need to factor IHT into the decision when choosing to invest in AIM shares. However, for those anticipating an IHT bill, willing to accept the added risk and volatility, and willing to allocate a suitable portion of their portfolio to AIM stocks, such shares could be worth considering. Keep in mind that any losses could quickly surpass the saving from the tax reduction.

"It's been a challenging period for AIM, and smaller companies more widely. Not only have UK smaller companies underperformed, but changes to IHT tax relief in the Autumn Budget have only compounded the problems for AIM," said Ellie Sawkins, investment analyst at Wealth Club. "'The resulting low valuations could attract experienced investors comfortable with the higher risks," she added. A recovery may take time, so consider the expected duration of investment and potential exit strategies for beneficiaries.

According to figures shared by HMRC in response to a Freedom of Information request from private wealth and family law firm TWM Solicitors, the crackdown on AIM shares will generate £110 million annually for the government, accounting for approximately 1.3% of total IHT receipts in 2024/25. This sum is small compared to total IHT receipts and the government's overall tax income. The Treasury could reap a 0.01% boost to its coffers overall due to the policy.

The Institute for Fiscal Studies (IFS) had previously forecast that an AIM crackdown would raise significantly more—between £1.1 and £1.6 billion annually. However, it's essential to note that these estimates were based on IHT being charged at the full rate (40%). Ultimately, the government elected to implement the relief at a reduced rate of 20%.

1. "For individuals with a large estate, the reduced business property relief on AIM shares could increase their inheritance tax liability significantly, which might prompt some to consider alternatives for their investment portfolios, such as traditional investing or other markets."
2. "Despite the benefits of lower tariffs on AIM, the new inheritance tax changes could deter some investors who value IHT relief as an essential factor in their investment strategy, potentially leading them to reconsider their investments in the property market or other forms of finance."
3. "In the wake of the reduced business property relief on AIM shares, investors may seek opportunities in less volatile and more liquid markets, such as the main market, leading to a potential shift in the focus of investment in the UK."

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