My ISA is ready for a 30% penny stock crash on 30 October!

Investing in the penny stock space already carries the risk of heightened volatility, and the waters may get even choppier come 30 October. That’s when Chancellor Rachel Reeves will unveil the government’s budget aimed at stabilising the UK’s public finances.

It’s now feared that inheritance tax relief on AIM-listed companies will be scrapped. This may force financial advisers to recommend their clients sell AIM stocks. This is due to ‘consumer duty’ rules, designed to protect clients from potential losses that advisers could have foreseen.

Many UK small caps, including the majority of penny stocks, are listed on the junior market. According to estimates from Peel Hunt, a City investment bank, the ending of this tax break could cause an immediate 20%-30% drop in the value of AIM-listed shares.

Uncertainty all round

Now, it needs pointing out that we don’t know what will happen in the budget. There might be no change at all. The FTSE AIM All-Share Index is only down 1.3% in the past month, so it seems investors are currently sanguine about this.

If this does happen, though, it would clearly be bad for a market that is already struggling to attract listings. Indeed, the London Stock Exchange has said the number of companies on its junior market has dropped to 704, compared to 1,694 back in 2007. Rising volatility is unlikely to encourage more private businesses to list.

It’s estimated that axing the tax break could potentially raise £1.6bn a year. That’s a drop in the ocean in the grand scheme of things (enough to pay government debt interest for a few days).

Therefore, I think it’d be a short-sighted move. Then again, I currently have five AIM-listed shares in my portfolio, so perhaps I’m biased.

How I’m reacting

A significant sell-off and declining market valuations could hinder AIM-listed companies’ ability to attract funding. Yet their immediate day-to-day business operations may not be directly affected.

So, I’d see a small-cap crash as an opportunity to buy the fear, to paraphrase Warren Buffett. One AIM stock I’d certainly like to buy 30% cheaper is Keystone Law Group (LSE: KEYS).

The network-style law firm, which has a £182m market cap, operates a platform where lawyers work as self-employed consultants. This allows for scalability without the high fixed costs of traditional companies.

Keystone has been growing revenue at a decent rate and is solidly profitable. The stock also offers a 3.2% dividend yield.

In the first half, revenue grew 8.3% year on year to £46.5m, while 153 new “high-calibre” lawyers made applications during the period.

Looking forward, a significant economic downturn could impact earnings growth. Also, the UK is now seeing an exodus of wealthy residents (Keystone provides a range of legal services often required by wealthy individuals).

However, I still think there’s a significant organic growth opportunity. As many law firms push for a return to the office, Keystone’s flexible model allows lawyers to work remotely and independently, potentially making it more attractive.

Plus, the company is led by founder James Knight, which I find appealing. Founder-CEOs often prioritise long-term business decisions, which aligns well with my own Foolish investing philosophy.

If there’s a Halloween scare in AIM stocks, I’ll be buying this one for my ISA portfolio.