Fears of sell-off on growth market as AIM investors face 80% tax rise

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Accountants voiced fears yesterday of a flood of money leaving the London Stock Exchange's junior Alternative Investment Market in the wake of the Government's decision to axe "taper" relief on capital gains tax.

The move could have a significant impact on the AIM, which has been phenomenally successful as a venue for young and fast-growing companies that often found it hard to raise funds before the junior market came into being.

AIM shares qualify for taper relief, meaning capital gains on AIM-listed stocks are currently eligible for tax of just 10 per cent if they were held for two years. From next year, when the single CGT rate of 18 per cent is introduced, holders of AIM shares will effectively face an 80 per cent tax hike when they come to dispose of them.

Chris Sanger, the head of tax policy development at Ernst & Young, said: "People with portfolio shareholdings on the main stock market have to pay tax on their gains at 40 per cent if they turn over their shares within three years and this reduces gradually to 24 per cent after 10 years' holding. In future people will be paying 18 per cent on their gains. Therefore, it will be real encouragement for individuals to trade shares and invest on the main market."

Whereas with most, but not all, AIM companies, the gain has been taxable at 10 per cent if individuals held them for more than 2 years. But in future they will be taxable at 18 per cent. So logically there will be a flow of investment from AIM to the main market.

AIM's success was not, of course, just built on the favourable CGT rules. AIM listed shares are still, for example, exempt from inheritance tax.

Companies will still look closely at the market not least because of its "light touch" regulation and the fact that it is significantly cheaper to list there than on the main market.

The LSE has also pointed out that 60 per cent of the money invested in AIM hails from city institutions.

A spokesman for the exchange said: "We are broadly very supportive of the Government's proposal to simplify the CGT regime and to cut the rate by such a large amount; this should help to make equities a more attractive asset class in which to invest. Nevertheless, we are mindful that the removal of business asset taper relief will affect one aspect of the favourable tax framework that AIM has enjoyed."

But Graham Shore, the managing director of Shore Capital, a nominated advisor to several AIM companies and market maker in AIM stocks, said it was bad news. "The first effect it will have is to encourage people to realise assets before the tax change comes in."

So will the CGT change cut the money available to new companies now that wealthy individuals derive no extra benefit from investing in AIM? That remains to be seen. The LSE is hopeful that because there is so much institutional money in AIM, it will not matter.

Higher-rate taxpayers likely to move investments

The Chancellor's radical overhaul of the CGT rules could boost stock market investment amongst private savers, analysts said yesterday.

Fidelity Investments said higher-rate taxpayers making gains would now pay just 18 per cent tax on profits made on the main London Stock Exchange, compared to the 40 per cent income tax charge on savings interest. Richard Wastcoat, Fidelity's managing director, said: "Stock market investment will overnight become far more attractive than squirreling money away in cash deposits."

Chris Sanger, the head of tax at Ernst & Young, said the reforms could presage a shift out of cash.

However, Mr Sanger warned long-standing equity investors would be hit by the abolition of indexation allowance on CGT. The allowance enables investors to increase the acquisition cost of assets held since 1982 or later by up to 104 per cent when calculating CGT bills.