Portfolio Adviser • Portfolio Adviser May 2025 • Small caps

Small-cap managers anticipate a mass delisting from the Alternative Investment Market as tax relief is cut, reports Tom Aylott, but should those companies exiting ‘be careful what they wish for’?

Companies listed on the AIM market have long been an attractive holding for tax-conscious investors, thanks to their exemption from inheritance tax. However, some small-cap managers anticipate a mass migration away from the AIM market over the coming year after chancellor Rachel Reeves halved their tax relief to 50% in October’s autumn budget.

Henry Lowson, head of UK alpha equities at Royal London Asset Management, explains: “There’s now a reasonable justification for having a lower proportion of your portfolio in AIM than you might have done in the past, so you’re already getting a number of companies announcing they will shift their listing.

“You’re going to see an exodus from AIM to the fully listed market over the course of the next 12 to 18 months, and that’s after a period where the small-cap universe has shrunk dramatically.”

The number of companies listed on AIM has withered to a third of its size since its peak in 2007, when the figure stood at 1,694. As at the end of April, AIM contains just 597 companies, with two of its largest constituents, Gamma Communications (with a £1.2bn market cap) and GlobalData (£996m), among the latest to announce their exits as the market loses the tax benefits that made listing there so appealing.

The declining number of AIM companies may mark an opportune moment for investors to re-evaluate the small-cap market’s purpose. It was launched in 1995 with the goal of providing capital to the UK’s smallest companies and boosting their growth, yet it has suffered from a lack of appetite for some time now, dropping 28.7% over the past three years.

The government’s watering down of one of the AIM market’s greatest appeals may be a sign that a new approach is needed for supporting the growth of small businesses in the UK, according to Sue Noffke, head of UK equities at Schroders.

“There’s a lot of work being done on UK capital markets, and we’re likely to see more of a focus on driving investment into the main markets,” she says. “Clearly, there have been a lot of changes that have made people reassess what their investment portfolios look like, whether that’s for pension sheltering or heritage tax planning, and I think AIM’s purpose has to be rethought as to what it does, who it’s appealing to and whether it has really provided a home for growth capital in UK businesses or not.

“Capital markets should have a key role to play in underpinning economic activity across the UK and to do that they need to be vibrant and supported.”

William Tamworth, manager of the Artemis UK Smaller Companies fund, agrees the AIM market has drifted away from the fundamentals it was built upon 30 years ago. Its initial purpose was to incentivise smaller companies to list by offering less regulatory and financial burdens than the main market. However, many of the companies that have left AIM in recent years have cited excessive costs and red tape as a reason for delisting.

Cutting tax relief on these companies may be another step in the opposite direction to where AIM was supposed to be headed.

Tamworth says: “Given the tax breaks associated with AIM, we need to be clearer about its purpose. It should be a platform for raising capital for smaller, riskier businesses at the early stage of their growth.

“Paradoxically, making AIM easier to leave could mean it is more attractive to join in the first place. You could go even further and companies that reach a certain value – perhaps £500m – which have been consistently profitable over a specific period – perhaps three years – could automatically be promoted from AIM to the main market.

“This would focus the AIM tax breaks on the companies that need them most and make them more defendable.”

Tax exemptions have been a significant motivation for those investing in AIM, and while these benefits are not as appealing as they once were, they still exist in a lesser form – something the main market does not possess. Smaller companies mulling a move to the main market must ensure their investment case is still an attractive one without these tax motives, Lowson warns.

“AIM has done a brilliant job of fostering innovative, early stage companies and helping them mature, but it has also been a beneficiary of advantageous tax incentives – that has been a factor in helping these companies grow,” he adds. “Because of the technical situation that has arisen as companies decide to move from AIM to the full list, we have seen a number of forced sellers of those shares, particularly from holders who have been very focused on inheritance tax.

“If companies decide they want to make that move they must ensure they have a strong balance sheet and are therefore able to support them- selves. A company like Gamma Communications, for example, has the ability to do a share buyback which will incentivise investors on the full list. But it’s only companies able to do that who can credibly get into a benchmark index.”

Those AIM companies migrating to the main market over the coming months should “be careful what they wish for”, according to James Henderson, manager of the Lowland and Law Debenture investment trusts. Despite recent reforms, these companies may regret ditching the benefits that being listed on the AIM market affords.

Henderson says: “There are a lot more compliance and governance costs associated with a main market listing and if they are small companies, they may still experience liquidity pressures because the big institutional investors managing open-ended products are more interested in larger companies.”

“I don’t buy that [costs and regulation on AIM are excessive]. If you want third-party capital you need minimum reporting standards and corporate governance. The regulatory burden on AIM is relatively light, especially next to the main market.”