AIM isn’t a recognised exchange for the purposes of these schemes, meaning that although they can’t ordinarily include quoted stocks, the advantages of AIM are available to them.
This incentivises investments into the often newer and smaller firms that tend to list on it which are consequently considered to be at the riskier end of the spectrum.
Tax incentives are applied to shares in companies that qualify as VCTs, EISs and under BR rules. For the first two, the incentives include a 30% relief on income tax, while BR can reduce inheritance tax to zero. The rules around what sorts of companies and activities qualify for these reliefs are broadly similar and historically AIM has provided a fertile ground for investments under these initiatives.
However, changes brought into force in 2018 have significantly changed the types of companies that can qualify for investment via VCTs and the EIS. The new rules now require that every pound invested via these schemes is a pound at risk. Although there is risk in any investment, the changes mean that companies with significant risk mitigants such as substantial asset backing and guaranteed income streams, no longer qualify for VCT or the EIS.
Although this risk to capital condition might have been anticipated to reduce investor appetite, early signs remain positive. According to the AIC, VCTs raised £731 million in 2018/19 – the second highest amount since their inception and the highest since 2005/06. The EIS, too, has remained resilient, but the number of applications being made for advance assurance (an indication of the likely number of new EIS-qualifying investment opportunities coming forward) has slowed – although this may be partially down to a change in HMRC rules which mean it will no longer consider “speculative applications”.
The risk profile of BR investments has traditionally always been lower than the EIS and VCT, but these changes may to some extent open up more opportunities for BR because some companies will now no longer qualify for the EIS or VCT on the basis that they are not deemed risky enough.
Over half of BR managed investment services are now AIM-focused, while on the other hand AIM shares form only a relatively small proportion of EIS offers. Across the 61 tax efficient AIM offers ever launched, just five have been EIS products, while 34 have been for BR. And despite a rise in recent years of VCT products, there have still been only 22 VCT offers on AIM.
This suggests the level of perceived additional risk on AIM has always meant that EIS and VCT AIMbased offers have been far fewer than BR. This is partly because the restrictions on the size – both in terms of employees and asset value – of EIS and VCT qualifying companies mean that a much smaller portion of AIM companies qualify for the EIS and VCT
tax reliefs, and those that do are at the lower end of the market where there is less resistance to volatility.
Although qualification for the tax reliefs requires a minimum holding period from just two years (BR), where companies meet the regulatory conditions, investors are generally advised to consider their tax efficient investments on a five to ten year horizon.
This also fits well with AIM investments, given the potential for volatility in the market. Despite peaks and troughs, AIM has continued to increase its market value since inception, even as the number of companies listed on the exchange has been reducing consistently since 2007. While investing over the long term is no guarantee of success (as this depends on the success of the underlying companies invested in), a longer term approach to AIM investments can help mitigate the higher level of volatility that the market can experience.
This piece has been published as part of the Alternative Investment Market Report 2019. For the full report click here