Labour Inheritance Tax Raid Could Trigger Stock Market Sell-Off, Experts Warn

Labour inheritance tax raid on AIM shares may lead to a significant stock market sell-off, raising concerns about potential negative impacts on small businesses and investor portfolios.

Labour Inheritance Tax Raid Overview

The Labour inheritance tax raid, proposed by Rachel Reeves, the Labour Chancellor, could have significant consequences for the stock market. Experts warn that abolishing inheritance tax relief on investments, particularly AIM (Alternative Investment Market) shares, might trigger a sell-off, negatively impacting investors and small businesses.

Current Tax Relief System

The current system, known as Business Property Relief (BPR), provides a 100% exemption from the 40% inheritance tax on qualifying AIM shares. This tax break, which costs around £1.4 billion annually, aims to help families pass on business assets without tax liabilities. However, the Labour inheritance tax raid seeks to abolish this relief to raise an estimated £1.6 billion for the Treasury by 2029-30.

Impact on the Stock Market

Darius McDermott from FundCalibre has expressed concerns that the Labour inheritance tax raid could lead to a significant sell-off, putting downward pressure on AIM share prices. He warns that this move could negatively affect AIM-focused portfolios, particularly in the short term, and could deter companies from listing on the market.

Nicholas Hyett from the Wealth Club echoes these sentiments, stating that abolishing inheritance tax relief on AIM shares could lead to the withdrawal of substantial investments, severely impacting company valuations. This could make it more challenging for small, fast-growing businesses to raise capital, counteracting the government’s efforts to support innovation and the London stock market.

Political and Economic Context

Rachel Reeves is under pressure to find ways to fund Labour’s commitments without resorting to income tax, National Insurance, or VAT increases. The Labour inheritance tax raid is part of a broader strategy to address tax avoidance and close loopholes, as outlined in Labour’s manifesto.

The Institute for Fiscal Studies (IFS) supports the idea of abolishing the tax relief, arguing that it disproportionately benefits wealthy individuals who choose investments based on tax incentives rather than performance. However, David Sturrock from the IFS acknowledges that the Labour inheritance tax raid requires careful consideration to avoid unintended consequences. He highlights the risk of investors shifting their money to other tax-exempt assets or moving it abroad, which could affect the overall revenue gains.

Inheritance Tax Overview

Inheritance tax applies to estates exceeding £325,000 or £500,000 if the main property is passed to direct descendants. Couples can combine their allowances, leaving up to £1 million tax-free. The revenue from death duties has recently reached record highs, driven by rising property values, with families paying £2.1 billion in the first quarter of 2024 alone.

Experts’ Concerns

Experts like Darius McDermott and Nicholas Hyett are particularly concerned about the immediate impact of the Labour inheritance tax raid on AIM shares. McDermott warns that removing the inheritance tax relief could lead to a significant sell-off, affecting the performance of AIM-focused portfolios. He believes that this change could make AIM a less attractive market for companies seeking to list, thus hindering the market’s growth.

Hyett adds that the sudden removal of inheritance tax relief could result in a massive withdrawal of investments, which would severely impact company valuations.

Potential Revenue from the Tax Raid

The Labour inheritance tax raid could potentially raise £1.6 billion a year for the Treasury by 2029-30, according to the IFS. David Sturrock, an economist at the IFS, believes that getting rid of the tax perk is a good idea. He argues that the current system is unfair because it benefits people who hold their wealth in certain ways and motivates them to choose investments based on tax relief rather than performance.

However, Sturrock agrees that the Labour inheritance tax raid requires careful consideration to assess the possible impact. He highlights that if people are only investing in AIM shares for the inheritance tax relief, then there might not be a good economic case for maintaining this tax perk.

Avoiding Unintended Consequences

Sturrock also points out that Labour may be tempted to close multiple loopholes simultaneously to prevent people from shifting their wealth from one tax-free vehicle to another. He warns that if the Labour inheritance tax raid curtails business tax relief, investors might move their money into other assets that benefit from relief, such as farmland or pension pots. In extreme cases, they might move their investments internationally, which would impact how much the government could raise. A comprehensive reform is more likely to be successful in addressing these issues.

Government’s Response

As discussions around the Labour inheritance tax raid continue, HM Treasury has yet to comment on the potential implications of these proposed changes. The debate highlights the ongoing tension between fiscal policy and economic stability, with the potential for significant market impacts if the proposed changes are implemented.

Conclusion

The Labour inheritance tax raid could have profound effects on the stock market and small businesses. While it aims to raise significant revenue for the Treasury, experts warn that it might lead to a stock market sell-off, affecting investors and the broader economy. Careful consideration and a comprehensive approach are necessary to avoid unintended consequences and ensure the proposed changes achieve their intended goals without disrupting the market.

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