On 5 August 2013, AIM became eligible to hold within an ISA.
That has had a significant impact on the Business Relief market where shares in companies that qualify for the relief can achieve 100% IHT mitigation. So much so that more than half of all Business Relief products now focus on investing in AlM quoted companies that qualify for the relief. This is because, for the last six years AIM shares have offered investors a route to IHT mitigation that also allows tax free growth and income.
On the flip side, an ISA is not IHT free, unless the shares in it qualify for Business Relief.
Of course, there is risk in AIM shares, and the generous tax reliefs on offer are all part of the government’s drive to support growing companies. But the market does have other advantages too:
- AIM is not subject to stamp duty. This depresses share prices when they change hands and in turn makes raising finance through issuing equity more expensive: research suggests the absence of stamp duty boosts AIM share prices by as much as 14% depending on share turnover and dividend yields.
- The maturity of some part of the market is beginning to belie the well-publicised high risk profile of the index. It boasts a number of established, larger, mature businesses with good levels of liquidity. Well known companies like ASOS and Fever Tree, both with market caps above £2.5 billion, have contributed to a growing level of maturity in recent years by choosing to remain on AIM – or even jump from the main FTSE index to take advantage of the junior market’s growth potential.
- Since AIM is under-researched, experts in this space have the opportunity to analyse AIM stocks and discover less well-known stocks trading on discounts to their larger peers. That makes for an interesting hunting ground not just for Business Relief investment managers, but also for those looking to combine value investing with other tax reliefs like Venture Capital Trusts and Enterprise Investment Schemes.
Investors must clearly take note of the dangers present, with smaller companies at higher risk of succumbing to the difficulties of lower reserves of cash and experience. They should also be aware that the main markets apply stricter regulations (although AIM has been strengthening its regulatory framework).
Equally, market sentiment can never be ignored, but volatility only tells part of the AIM story; according to FTSE Russel data, at 31 July 2019, the FTSE AIM 100 delivered an average 9.3% per annum over the last five years. So, if you invested £20,000 in an AIM ISA, tracking the AIM FTSE 100, a year after AIM became eligible to hold within an ISA, and reinvested your gains, you’d now have almost £32,000.
I’d take that tax-free gain as a birthday present!