The potential removal of inheritance tax (IHT) relief from AIM could create an "AIM-pocalypse," causing widespread disruption beyond high-net-worth investors, according to Wealth Club.
The change could lead to significant market volatility, affecting both investment funds and private shareholders.
Wealth Club's research highlights that as of June 2024, £8.3 billion was invested in AIM by UK funds, accounting for 16.5% of the AIM All-Share Index. Of the 321 funds surveyed, 209 held AIM stocks, with some funds, such as Liontrust and Marlborough, particularly exposed.
Nicholas Hyett, Investment Manager at Wealth Club, warned that pulling IHT relief would have "far-reaching consequences".
While AIM companies are high-risk, they are also innovative and fast-growing, making them attractive beyond tax benefits.
A sharp drop in valuations could damage the UK’s smaller companies sector, making it harder for these firms to raise capital and potentially pushing them to seek funding abroad.
For a government focused on growth, Hyett argued, this would be a damaging outcome.
Other industry figures share these concerns. Steven Fine, CEO of Peel Hunt Ltd, warned the Financial Conduct Authority (FCA) that removing IHT relief could trigger a sell-off, potentially wiping a third off AIM's value.
He noted that financial advisers would likely urge clients to sell AIM stocks to avoid breaching consumer duty rules if the tax break were scrapped.
Julia Hoggett, head of the London Stock Exchange, echoed these warnings in a letter to City Minister Tulip Siddiq.
She highlighted the risk of market volatility as investors and funds rush to liquidate holdings, particularly given the illiquid nature of smaller companies.
AIM has already seen a decline in listed companies, with numbers shrinking from over 1,000 in 2013 to around 704 today. Access to capital, low trading liquidity, and high listing fees have contributed to this exodus.
Wealth Club's Hyett said: “There is a perception that pulling inheritance tax relief from AIM might be painful, but would only hit a handful of mega-wealthy investors looking to minimise their IHT bill.
"That view fails to appreciate the important role AIM plays in the wider UK investing landscape."