With the Spring Budget now just days away, the Chancellor has the opportunity to use tax incentives to boost the supply of fresh capital into the smaller listed companies sector.
What are possible solutions?
One option gaining some traction is the idea of a ‘British ISA’. Placing investment restrictions on the existing ISA allowance would make little sense and would likely prove unpopular. However, an additional, incremental uplift to the allowance for investment in UK small and mid-cap companies – either directly in shares or via investment funds – could be an attractive way to help solve the problem. For example, if just 200,000 ISA investors allocated an additional £5,000 to the UK smaller companies sector, the £1bn of extra funding would represent a sector record for the last 20 years.
Similarly, the Treasury could explore the option of extending the AIM inheritance tax exemption to all smaller listed companies and funds investing in smaller companies. Currently, individuals can take advantage of investing in qualifying AIM stocks that, once held for two years, are exempt from inheritance tax. If the exemption were broadened beyond AIM to fully-listed small and midcap UK companies, it could prove to be an effective way of generating renewed investor interest in the smaller companies sector.
Finally, and while not directly a tax incentive, the Government could look to build on the recent Mansion House Compact with major DC pension providers. By encouraging investment not just in unlisted (private) equity but more broadly in the UK small and mid-cap sector, it would provide better diversification for pension savers as well as the opportunity to support a wider range of British companies with their pension savings.
The missing part of the plan
Building on the support for British start-ups and scale-ups to grow and list on the London Stock Exchange with measures to boost the supply of capital for small and mid-cap listed companies could be the missing part of the policy plan. And it could provide a boost to the overall health of UK public equity markets.
As the example of ARM Holdings plc clearly demonstrates, the UK has an enviable track record of developing innovative growth companies. But support is needed across almost the full spectrum of equity provision to ensure not only that growth companies want to list in the UK; but that once they are listed, they can continue their growth story.