Budget 2024: AIM shares no longer IHT exempt, and ISA allowance frozen

One of the policy announcements that could potentially fly more under the radar was the souring of the inheritance tax (IHT) sweetener for AIM shares. 

Chancellor Rachel Reeves said that AIM shares would no longer have full exemption from IHT. Instead, AIM shares will attract an inheritance tax rate of 20% if they are held for two years.

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The Budget statement, published following Reeves’ speech, said: “The government will also reduce the rate of business property relief to 50% in all circumstances for shares designated as ‘not listed’ on the markets of a recognised stock exchange, such as AIM. This will affect around 0.3% of estates each year.”

In response, the AIM market rallied, with the FTSE AIM All-Share Index rising to close to 4% (at the time of writing at 2.15pm). This appears to be a relief rally as there were concerns that the IHT break would be removed entirely, which we covered in a recent episode of our On The Money podcast. 

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The IHT exemption for AIM shares was introduced more than a decade ago, alongside AIM shares being eligible to be held in tax-efficient ISAs. Most shares listed on AIM qualify. Generally, to qualify the companies must be trading businesses and not investment companies. 

Another announcement of note, which came in the Budget statement rather than during Reeves’ speech, is that ISA allowances will be frozen at their current levels until 5 April 2030.

Annual subscription limits will remain at £20,000 for ISAs, £4,000 for Lifetime ISAs and £9,000 for Junior ISAs and Child Trust Funds until 5 April 2030.

On the one hand this is good news for investors, as it provides clarity that the ISA allowance will not be cut. Ahead of today’s Budget there was speculation that the ISA allowance could be lowered, and that a lifetime cap on ISAs could be introduced.

However, those who can maximise the current ISA allowance – around 15% of ISA investors – may have been hoping that the government reverted to the days of the annual allowance increasing in line with inflation.

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Turning back to AIM shares, it has been a tricky market for investors to navigate, both over the short and long term. The AIM All-Share index has risen just 3.3% over the past decade, and over five years it is down -16.5%.

Over three years it has been a particularly painful period with higher interest rates causing investors to dial down on risk. Over this time, the index is down nearly -40%. This shows that even with the tax break, investors have to work very hard to find winners.

Fund managers offering AIM IHT portfolios will be breathing a collective sigh of relief. The portfolios tend to go for larger, dividend-paying companies. The major stakes tend to be in FTSE AIM 100 constituents. These companies are the most liquid, meaning they are easier to buy and sell than companies of a smaller size.

The largest shares include some well-known companies such as Jet2 (LSE:JET2), Fevertree Drinks (LSE:FEVR) and YouGov (LSE:YOU), as well some investor favourites including Gamma Communications (LSE:GAMA), Craneware (LSE:CRW) and RWS Holdings (LSE:RWS).

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As well as various AIM IHT portfolios, there are a number of funds, particularly UK smaller companies funds, that invest in the AIM market. Bear in mind, though, that such funds do not give investors IHT relief.  

Commenting on the IHT change for AIM shares, Abby Glennie, manager of abrdn UK Smaller Companies, said: “The government did not quite throw in the hand grenade for AIM entrepreneurs and investors that many expected – and valuations of AIM companies ticked up immediately after the announcement, supported by buying demand. However, IHT applied on AIM assets at 20% still makes investing in the market less attractive than previously.

“With tax benefits halved, investors will need to be more positive on return prospects to allocate cash to AIM and this could swing allocations towards other areas.”