AIM will face a "cliff-edge moment" if the Chancellor abolishes inheritance tax relief on companies listed on the junior market, a City broker has claimed.
Steven Fine, the boss of Peel Hunt Ltd (AIM:PEEL), has written to the Financial Conduct Authority warning removing the tax break could trigger a sell-off in the market that could wipe up to a third off the market’s value.
Under customer care rules, Peel Hunt says clients would be advised to sell smaller stocks if the tax break were removed.
“This would put further selling pressure on Aim stocks,” he told the FT.
“I’ve made the FCA aware that the abolition of Aim tax relief could cause severe market distortions, especially if advisers feel compelled to withdraw clients’ money for fear of breaching consumer duty rules if they don’t.
Fine’s comments echo sentiments in a letter from the head of the London Stock Exchange Julia Hoggett to City Minister Tulip Siddiq, which said removing the tax break would question the long-term viability of AIM.
Hoggett wrote: "An announcement of the removal of BR in the budget is likely to result in significant market volatility as individual investors and IHT funds seek to liquidate holdings in companies that have been long-term beneficiaries of BR investment.
"Given the illiquid nature of smaller companies, we are concerned that this volatility would have a disproportionate impact on share prices across the market."
The number of companies listed on AIM has been shrinking steadily in recent years as companies have struggled to raise finance with around 704 companies valued at approximately £76bn now the junior exchange.
Peel Hunt estimates there is around £6bn in funds created for Aim stocks with inheritance tax relief, while individuals have about £5bn directly invested.
Removing this money would be likely to lead to share prices dropping by between by 20-30%, Peel Hunt added.