April 2008 will see the rate of capital gains tax for Aim shares rise from 10 per cent to 18 per cent. The abolition of taper relief - effectively an 80 per cent increase in tax for Aim investors - brings it in line with the main market, at a time when the cost of putting a company on Aim is also getting closer to a full listing.
Observers say that Aim could see a flurry of merger activity, as companies’ management - typically large stakeholders - look to cash in at a lower tax rate. Meanwhile, loss-making York Pharma is among the first Aim companies to blame the abolition of taper relief for its falling share price, though trading volumes haven’t increased since October’s pre-budget report.
But the effect on Aim’s large base of private investors looks to have been overblown. Aim’s speculative investors - who wouldn’t have held shares for the two years required to qualify for taper relief - are still paying less tax than the 40 per cent top rate. “Our view is that 18 per cent rather than 10 per cent is unlikely to be a very great deterrent to dabbling in Aim stocks,” says Martin Sherwood, head of tax efficient solutions at financial advisers Smith & Williamson. And initial fears that the chancellor may make Aim a recognised exchange, thus making investments eligible for inheritance tax, now seem misplaced. That would create “total uproar”, says Mr Sherwood, adding that inheritance tax relief is a greater incentive for Aim investing.
Graham Shore, group managing director of Shore Capital, one Aim’s largest market makers, argues that the changes could ultimately benefit Aim investors. By removing some of Aim’s tax breaks, the government is undermining its argument for excluding Aim shares from personal equity plans (Peps) and individual savings accounts (Isas). “They need to look at Pep and Isa relief again,” he says.
