London’s markets have become a “burning platform” for smaller companies and the pain will be compounded if the Chancellor scraps inheritance tax relief for shares on London’s AIM exchange, City bosses have warned today.

Ahead of the budget on October 30, a group of AIM listed companies and City think tank New Financial have added to growing warnings around the health of London’s junior stock market amid rumours the Chancellor Rachel Reeves is considering scrapping an inheritance tax exemption on AIM shares.

Shares on the market currently enjoy a tax-break which relieve them from the levy if they have been held for at least two years. Reeves has been urged to ditch the relief in a move which could raise around £1.6bn a year, according to the Institute for Fiscal Studies.

However, the suggestion has triggered furious pushback from the companies amid fears the move could gut the market of some £6bn of investment from specialised inheritance tax vehicles.

In a new report published today, City think tank New Financial warned the move would be “dangerous” for AIM after two decades in which London’s markets had already become a “burning platform”.

“The ‘nuclear option’ of abolishing the business relief that effectively exempts investments in most AIM stocks from inheritance tax would cause huge disruption and we would not recommend it,” the group, headed by William Wright, said.

“Far from abolishing it, the government could commit to extend it to at  least the end of this parliament,” it added.

City broker Peel Hunt has warned that shares could dive as much 30 per cent should Reeves decide to end the relief. The move would also dent overall tax revenue to the tune of £3.2bn due to a reduction in corporation tax receipts, it has predicted.

Speaking with City AM yesterday, a group of AIM firms echoed the calls and warned that investors would start “dumping” their shares if the break was removed.

“The government might get a one-off billion pound tax saving by removing it, but that is a complete mirage as doing such a thing would potentially create tens of billions worth of damage to London as a location to develop fast-growing public companies,” said Cathal Friel, co-founder of multiple companies currently listed on AIM and non-executive director of AIM-listed European Green Transition.

Simon Deacon, chief of AIM-listed Light Science Technologies, added that small cap companies in London “could be the companies of the future” but Treasury needed to “incentivise money into the market”.

“It doesn’t necessarily need to cost the Treasury, there will be more money brought in as companies grow,” he added.

Gary Marsh, founder of £147m AIM-listed Solid State, told City AM, the move would “really cause problems” for the companies.

The number of companies on AIM has already dwindled to just 610, down 88 from last year, and the average size of a company listed on London’s junior market has shrunk 11 per cent in the last year to just £111m.

A recent letter from London Stock Exchange boss Julia Hoggett to City minister Tulip Siddiq warned that the “ongoing viability” of AIM would be threatened by the removal of IHT relief.