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The implication of Alistair Darling’s decision to scrap taper relief for private investors and Aim is pretty clear-cut. Sell now and you’ll only pay 10% tax on your gains, wait until the new tax year on 6 April and that bill will be 18% of your profits. But what about the consequences for Aim market as a whole?

Some had predicted the wholesale exit from Aim of the small shareholder – believed to own about half of the market with the other 50% in institutional hands – leading to a disastrous slump. Others speculated as to the possible consequences of a sellout by Aim’s owner managers.

Facing the same 80% tax hike as everyone else, the entrepreneurs would rush for the door, dumping huge slugs of their companies’ shares on the market. Those not dumping stock in panic would engineer an orderly retreat by means of trade sales prompting a mergers and acquisitions boom.

As it happens we probably won’t get any of these scenarios. Most private investors who were thinking of selling up have probably already done so. Directors irrationally dumping stock, especially in light of worsening liquidity since the credit crunch, was never credible. Meanwhile an ‘entrepreneur’s relief’ means owner-managers are now in no rush to sell.

Jim McCafferty, head of research at broker Seymour Pierce, says: ‘I think [private investor selling] is all in the price since people started talking about this in October, when stocks such as Domino’s Pizza (DOM:AIM) were hammered.’ Environmental services firm TEG (TEG:AIM) was another stock to be hit, with chief executive Michael Fishwick blaming the tax changes for the 23% drop in the share price seen last October.

Entrepreneur’s relief

But a cursory look at how the market has performed in the past couple of weeks, since the scrapping of taper relief was confirmed on 24 January, seems to support McCafferty’s view that any major selling has now already happened (see chart).

Until 24 January, it had been speculated that Alistair Darling would defer the scrapping of taper relief for a year – some private investors were holding off selling for this very reason. As it happened, the chancellor unveiled his ‘entrepreneur’s relief’ whereby only owner-managers would still benefit from a 10% tax rate. Shortly afterwards it was confirmed in draft regulations that everyone else, including private investors would still pay 18% from 6 April.

And has there been undue selling pressure? It seems not. Since Darling made his announcement – which incidentally coincided with the latest market rebound – the FTSE Aim All Share is up 2.5%, not far off the 4.1% gain in the FTSE All Share.

McCafferty says that retail selling back last autumn was generally only an issue for the smallest ‘sub-£10 million’ companies. It’s hard to confirm this since, while the FTSE All Share has its own dedicated small cap index with the FTSE Small Cap, Aim doesn’t have the equivalent for its micro caps. The performance of the FTSE Aim All Share is unduly impacted by its largest constituents, many big enough to be in the FTSE 250. McCafferty, however, believes many penny shares have been oversold and are now in for a bounce.

What was also unclear until the 24 January announcement was whether the tax changes would spark a bout of consolidation. There had been much talk about an acquisitions frenzy. The ‘entrepreneur’s relief’ now means owner managers who hold at least 5% of an Aim company will only have to pay 10% tax on the first £1 million capital gains. Many, clearly, will no longer be in a rush to sell up.

While private investors will be hit hard by the tax hikes, the impact on Aim as a whole will not be too great. Much of the selling by small investors appears to have happened already. On the downside, however, last-minute changes to the tax reforms mean that the mergers and acquisitions boom will not materialise. Good for the owner managers who no longer have to sell in a hurry but not so exiting for the investor.

What the changes mean for individual investors

How much capital gains tax you currently pay depends on whether your gains were made on ‘business assets’ or ‘non business assets’. Under HM Revenue & Customs (HRMC) rules, Aim securities, such as shares in private companies, qualify as business assets. The shares quoted on the main market are non-business assets.

The business asset status means Aim shares enjoy a maximum 75% taper relief on capital gains tax after two years. (Taper relief is also available for main-market shares but at a much lower rate). That means a higher-rate tax payer goes from 40% to 10%. A lower-rate tax payer goes from 20% to 5%. From 6 April the concept of taper relief and business assets will disappear and all gains will be taxed at 18%.