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Q&A: AIM shares and ISAs

The government is allowing AIM shares to be held in stocks and share ISAs, but what does that mean and should you invest?

 

by Michelle McGagh on Jul 10, 2013 at 16:09

Q&A: AIM shares and ISAs

The government plans to expand the range of investments allowed in stocks and shares ISAs, to include riskier small shares.

Here we explain what you need to know.

What can I invest in through a stocks and shares ISA?

The current ISA limit is £11,520 for a stocks and shares ISA for the 2013/14 tax year. Or you can invest up to £5,760 in a cash ISA and put the balance into a stocks and shares ISA.

You can invest in a number of investments, including individual shares or bonds, and collective investments like funds.

Click below to see the full list.

Stocks and shares ISAs can include:

  • shares and corporate bonds issued by companies officially listed on a recognised stock exchange anywhere in the world
  • gilt edged securities ('gilts'), issued by the UK government, similar securities issued by governments of other countries in the European Economic Area and 'strips' of all these securities
  • units or shares in funds authorised by the Financial Services Authority (unit trusts or Open Ended Investment Companies (OEICs))
  • units or shares in non-UCITS (Undertakings of Collective Investment in Transferable Securities) retail schemes authorised by the FSA for sale to retail investors in the UK
  • shares and securities in investment trusts
  • units or shares in UCITS funds based elsewhere in the European Union (these are similar to unit trusts and OEICs authorised by the FSA)
  • any shares which have been transferred from an HMRC approved SAYE share option scheme or Share Incentive Plan
  • life insurance policies
  • stakeholder medium-term products

What’s changing?

At the moment the stocks and shares you invest in must be listed on a traditional, established and registered stock exchange, like the London Stock Exchange.

This means that shares listed on non-traditional stock exchanges including the Alternative Investment Market (AIM) and its less-well known alternative, the ICAP Securities and Derivatives Exchange (ISDX), have been excluded.

But, amid financial industry support, the government is pressing ahead with plans to allow AIM and other alternatively-listed shares to be included in ISAs. Because the UK is ruled by European law, ISAs would also be allowed to hold shares listed on alternative markets in the European Economic Area.

When will this happen?

The Treasury plans to introduce legislation this month that will set the ball rolling for implementation in Autumn.

Will the contribution level change?

Just because the investment options are expanding, it doesn’t mean that investors will be able to put more money into their ISA unfortunately. The limit will remain at £11,520 until April 2014.

Are the tax breaks the same?

AIM shares are well-known for their generous inheritance tax (IHT) tax break. The majority of AIM shares fall under the scope of ‘business property relief’ which is 100% exempt from IHT. So if you die holding AIM shares in your portfolio or ISA then they will not count towards your estate when calculating IHT (which is paid at 40% on assets over the £325,000 individual allowance).

It is worth noting that AIM-listed companies that are involved in investment business or property development do not typically qualify for business property relief and so are not exempt from IHT.

The government has confirmed that AIM shares held in an ISA will not lose their IHT exemption meaning that people who invest in AIM shares through ISAs could benefit from a double tax break, firstly on the tax-free status of ISAs so you pay no tax on any gain in the shares or dividends paid, and then again in death.

Why is it happening now?

The government is hoping that the ability to invest in AIM will ensure small businesses, which are finding it increasingly hard to obtain funding, are able to access alternative methods of funding from banks.

‘The government has tried to push banks to lend to small companies but it has now woken up to the fact that there is a vigorous equity market [in the UK] that is looking to invest in these businesses,’ said Gavin Oldham, chief executive of The Share Centre, who said he has been campaigning for the change for 12 years.

Is investing in AIM a good idea?

Investing in AIM shares is not to be taken lightly. To put AIM in context we have to look at how the market has performed since 2000.

It hasn’t done well.

On 3 January 2000 the value of the AIM All-Share market stood at 2,925 but today it is at just 705 – that means that the market has lost 75% over the past 13 years. It took its biggest battering in 2008, falling 62% in the six month to the beginning of December.

Since January this year, the market has fallen from 734 to 705, almost 4%.

Potential AIM investors also face a lack of information.

The companies on AIM have floated on that particular market because they are small and are not particularly well established so there may be limited information about the company available. And you will need to look closely at company accounts to ensure you’re not investing in a dud.

Of course, investing in any stock market is risky and there are no guaranteed returns, but AIM multiples the risk.

If you want to invest in smaller companies, there are alternatives. The FTSE SmallCap index, which tracks smaller companies, has risen 32% over the past twelve months, while over three years it is up 43%.

There are also investment funds specialising in smaller companies that you can invest in if you are unsure of what specific stocks to choose. The funds will invest in a variety of stocks, meaning that the risk of one of them going bust is spread.

Oldham said changes need to happen within the AIM market in order for it to be more attractive to investors.

He said more companies need to make the first issue of their shares, which are typically offered first to big institutions and large stockbrokers, available directly to retail investors. Currently retail investors are forced to purchase the shares on the secondary market, meaning they could pay more for the shares.

Is anything else being allowed into ISAs?

Some financial product providers hope that the inclusion of AIM shares into ISAs will open the door for other investments to be included in the wrappers.

Amid scrutiny of traditional banks, a peer-to-peer lending site has said competition could be increased by providing perks for alternative lenders.

‘Peer-to-peer lending has the capacity to improve retail banking, and replace aspects of it altogether, but only with the right regulatory and tax framework to underpin it,’ said Alex Gowar, director at Ratesetter.com.

‘The sector would benefit enormously from being granted the same benefits and incentives offered by the government to other financial services sectors, particularly the extension of the ISA wrapper to cover peer-to-peer lending products.’

So far, the government has given no indications that it will expand ISAs to other types of investments.

6 comments so far. Why not have your say?

Micawber

Jul 11, 2013 at 06:24

I read somewhere that not all AIM shares are exempt from IHT- like property and financial shares, for example - but these "FAQ" make no mention of that. Is it true?

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busy bee

Jul 11, 2013 at 16:12

Yes - please correct the article and know your facts - not all AIM shares are IHT free.

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Michael Crockett

Jul 11, 2013 at 16:56

I believe the article in incorrect in saying that the AIM market was at 2925 on 3 January 2000. The figure quoted is in fact AIM's all time high reached at the height of the tech boom in March 2000.

Whether it was January or March 2000, the article is most misleading to quote AIM's performance taking the peak of a bubble as a start point. Perhaps to show bias in the opposite direction you could consider that AIM was at just 394 on 1st January 2009 and thus it has grown by more than 75% in just over 4 years.

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Anthony Tinslay

Jul 11, 2013 at 17:34

Yes a poorly constructed article overall. Clearly the comparison of AIM market is meaningless as pointed out above. Also for AIM shares to qualify for IHT relief there are certain important criteria. To qualify they must be held for at least two years in a five year period and qualify for business property tax relief. As i understand it the following are certain exclusions for qualification

"A business or company is engaged wholly or mainly in dealing in securities, stocks or shares, land or buildings, or in making or holding investments;

■ A business is not carried on for gain;

■ A business is subject to a contract for sale, unless that sale is to a company that will carry on the business, and the sale is made wholly or mainly in consideration of shares in the company buying the business.

■ Shares in the company are subject to a contract for sale or the company is being wound up, unless the sale or winding up is part of a reconstruction or amalgamation to enable the business of the company to be carried on"

Hopefully all will be revealed and set clear in due course.

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michelle mcgagh

Jul 17, 2013 at 14:39

Thanks to those who flagged my omission re investment businesses and property developers listed on AIM. You are correct that they do not qualify for business property relief and so are not exempt from IHT.

Michelle

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RBNF

Aug 04, 2013 at 11:25

Aim shares are not eligible for inheritance relief if they are quoted on a designated as recognised stock exchange (by HMRC).

In April2013 HMRC added ICAP to its lists of such exchanges.

Some of my holdings

Nicholls

RWS

IOMart

Albamarle & Bond

Are quoted on the ICAP Market implying they have lost their eligibility for IHT relief

Is this right?

Rodney

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