Does the IHT clampdown make investing in AIM still worthwhile?

HMRC anticipates that the impending inheritance tax changes on AIM shares will generate £110 million annually

Beginning in April 2026, the tax break will be eliminated, which could result in an inheritance tax of 20%.

It is unclear if trading on London's junior market is worth the risk because shares traded on the alternative investment market (AIM) will be subject to inheritance tax (IHT) starting in April 2026.

Smaller businesses that may not be able to comply with the main market's listing requirements can be found on AIM. Not every business will be a success, but some present chances for rapid growth. AIM is typically more volatile and less liquid than the primary market.

AIM share investors have historically benefited from business property relief, which states that no IHT is owed upon death as long as the original owner has held the investment for at least two years. For investors, this served as a useful inducement.

Nevertheless, following adjustments revealed in the Autumn Budget, business property relief will be cut in half starting in April 2026, from 100% to 50%. Families will therefore pay 20% IHT, which is half of the full 40% rate.

Head of money and markets at Hargreaves Lansdown Susannah Streeter stated, "Investing in such companies, given how fledgling some are, is a risk, and one that some investors might have been prepared to take historically given that IHT wasn't due on such portfolios."

In terms of fostering an environment that supports entrepreneurial enterprises, this minor adjustment could have significant effects and work against the chancellor's growth agenda.

The stock of AIM has suffered in recent years. According to market close on April 17, the FTSE AIM 100 has lost nearly 20% over the last five years. The FTSE 100 has increased by nearly 38% during that time. Due to takeovers and businesses relocating to the main market, London's junior market has also seen a decline in the number of companies.

"AIM's total number of companies at the end of 2024 was 688 stocks, the lowest since the end of 2001. This is a significant decrease from the 1,700 stocks that were present at its peak in 2007." Additionally, according to Dan Coatsworth, an investment analyst at AJ Bell, 2024 saw the second-lowest number of initial public offerings (IPOs) since AIM's 1995 launch, which took place 30 years ago.

Are shares of AIM worthwhile?

AIM shares will continue to provide an IHT break even after the new regulations take effect in April of next year. Families will pay an IHT rate of 20%, which is half of the full 40% rate, as business property relief will be cut in half, from 100% to 50%.

Your tax situation and risk tolerance will determine whether or not this presents an alluring offer. Because IHT is only due after your tax-free allowances have been depleted, those with smaller estates may not need to look for ways to lower their IHT liability.

Everyone is allowed to transfer up to 325,000 tax-free (also referred to as the nil-rate band). If you give a direct descendant the family home, you might be eligible for an extra 175,000 allowance.

Married couples and civil partners may theoretically pass on an estate worth up to £1 million tax-free by combining their nil-rate bands (325,000 + 175,000 + 325,000 + 175,000). Less than 5% of deaths result in an IHT charge, which is partly due to this sizeable amount.

If your estate does not currently exceed these thresholds and is not likely to do so by the time you die, do not consider IHT when making your investment decision in AIM shares. If you believe that AIM companies present a strong investment opportunity, you can still invest in them, but there won't be any tax benefits.

In the meantime, AIM shares might be worth looking into if your estate is likely to generate an IHT bill and you are prepared to take on the extra risk and volatility that come with investing in London's junior market. Just a small percentage of your portfolio should be allocated to AIM stocks; make sure it is still appropriately diversified. Additionally, keep in mind that the advantages of the tax savings could be swiftly outweighed by any losses.

"The past few years have been challenging for AIM and smaller businesses in general. In addition to the poor performance of smaller businesses in the UK, AIM's issues have been made worse by changes to IHT tax relief that were announced in the Autumn Budget, according to Wealth Club investment analyst Ellie Sawkins.

As a result, AIM valuations are near their lowest points in ten years. Because of this, AIM might appeal to seasoned investors who are willing to take on greater risk. Long-term investors may be looking to score a deal.

You should also think about how long you and your beneficiaries plan to keep the money invested, since a recovery may take some time. The shares may leave the market at an inopportune moment if your loved ones intend to sell them as soon as they inherit them (possibly to assist with the IHT bill).

What is the expected increase in the IHT crackdown?

According to data released by HMRC in response to a Freedom of Information request from private wealth and family law firm TWM Solicitors, the government will receive 110 million dollars a year from the crackdown on AIM shares.

The 110 million amount is equivalent to approximately 1 point 3 percent of the total inheritance tax revenue, which is expected to reach 8 point 3 billion in 2024 - 2025.

Considering that IHT already makes up less than 1% of the total taxes collected by the government, this is a minor issue. Accordingly, the policy may result in a 0.01% increase in the Treasury's overall coffers (1 percent of 1 percent).

According to earlier estimates by the Institute for Fiscal Studies (IFS), an AIM crackdown would generate between 1 and 1 billion more each year. Note that these figures were predicated on the assumption that IHT would be applied at the full rate of 40%. The government ultimately agreed to implement it at a 20 percent rate.

The modifications might put pressure on London's junior market even though they won't generate much revenue. By the end of the trading session on April 17, the FTSE AIM 100 had dropped about 11% since the Autumn Budget. This is in contrast to the 1 point 4 percent increase in the FTSE 100.

Due to Donald Trump's tariffs, small-cap companies listed on AIM are more susceptible to recessionary risks than their large-cap counterparts. These risks have increased in recent weeks. However, the removal of tax breaks won't have been beneficial.

How to lower your IHT bill.

Because of the IHT relief, AIM shares are now one of the most widely used investment vehicles for inheritance tax reduction. "That approach is greatly impacted by this change," stated Laura Walkley, a partner at TWM Solicitors.

You can donate assets while you are still alive, but you must outlive the gift by seven years to avoid paying IHT, unless the gifts fall under one of the inheritance tax gifting allowances. Elderly investors frequently purchased AIM shares for IHT purposes as a result.

Families might turn to alternative tactics in light of recent developments. This can entail using a gifting rule loophole that permits you to donate as much as you like as long as it comes from regular income rather than capital.

Walkley stated, "You will need to maintain accurate records and be able to demonstrate that the gifts were made from surplus income." "HMRC also needs specific year-by-year data demonstrating that these out-of-income gifts haven't affected your quality of life.