Watch out: inheritance tax benefits on AIM stocks to change in April

Investing in shares on London’s AIM market is a way to pass down wealth at death without losing money to the taxman. Certain AIM stocks qualify for 100% inheritance tax relief, yet the rules will change from April 2026. Now is an ideal time to understand how the system currently works and what will change in the future.

How the AIM system currently works

An investor’s estate is exempt from the 40% inheritance tax charge on investments in AIM stocks that qualify for business property relief if the investor had held them for at least two years at the time of death.

The minimum two-year qualifying period starts when you buy each chunk of shares, not simply the first time you bought into that company. The clock starts ticking from the point at which you invest in qualifying stocks. If you buy more stocks for a second (or more) time, a new clock starts for that amount of money.

If you sell the stocks after the two-year qualifying period ends, you have three years to use that cash to retain the inheritance tax benefit, but you must reinvest in qualifying stocks by the time that three-year period ends and held them at the time of death.

How the system changes from April 2026

From 6 April 2026, the 100% relief on inheritance tax will drop to 50% on qualifying AIM shares. The changes are part of the government’s plan to strengthen public finances. HMRC believes it will raise an extra £110 million in inheritance tax per year from these changes alone.

Which AIM stocks qualify for relief?

To meet the criteria for tax benefit, the AIM-quoted company needs to qualify for business property relief, which excludes those that are not-for-profit or only generate investment income, such as through real estate lettings. It’s important to note the taxman does not publish a definitive list because the qualification status of a company can change over time.

Business property relief originally came into power in 1976 for family firms passed down through generations, so that inheritance tax bills wouldn’t put a privately-owned business into liquidation.

It was subsequently expanded to include holdings in businesses quoted on London’s AIM market, following concerns that such investments were harder to sell quickly than shares on London’s Main Market.

While AIM stocks typically remain smaller in size versus those in the FTSE 350 index, it’s fair to say that liquidity has improved since the junior market launched in 1995.

Risks associated with the changes

There are potential downsides to the inheritance tax relief changes coming into force from April 2026. Not only will the system be less generous, but it could also have wider implications for AIM stocks in general. Here are two risks to consider.

1. AIM stocks become less appealing to investors and that dampens broader interest in small cap shares.

Companies typically admit their shares for public trading so they can access capital markets. AIM is one place where companies can tap a broad pool of investors for more cash through issuing new shares. Certain companies will have joined AIM in the knowledge that the tax relief benefits are a key attraction for investors. A reduction in the tax benefits creates a danger that fewer investors are willing to back the type of stocks you find on AIM, principally small companies. That could also lead to a reduction in companies wanting to float on the AIM stock market.

2. A reduction in investor interest could depress company valuations and see the AIM market shrink further in size.

Cutting the tax relief in half could potentially result in fewer people wanting to hold AIM stocks, causing share prices to fall and these types of companies to trade on lower valuations. The knock-on effect could be an acceleration of UK companies being taken over if more companies are trading cheaply.

The number of companies joining the AIM market is significantly lower than those leaving through takeovers or voluntary de-listings, meaning investors have a shrinking pot of opportunities to access.