Take AIM and invest for multiple tax benefits

Current Overview

It is somewhat early days still but data signs currently suggest the UK economy is
encouragingly “bucking Brexit”. Whether this is down to a stoic British Bulldog
determination it may be but consumers are seemingly much more confident now
after an immediate dip in July. We are thus on track to skirt recession (technically
two consecutive quarters of economic reversal) at least this year. A meaningful
recovery in the pound is entwined with these latest realities if down largely to a
big recent rebound in the important services sector. Record low reduced interest
rates (now at 0.25%) and increased central bank bond buying (QE) to combat the
possibility of a downturn have also been important levers. It is still unclear how the
retail sector is fairing as August sales don’t look good. This however is probably
down to hot weather and Olympic distractions. Overall it is probably fair to say we
are not out of the woods yet, being way too early to realistically know what the
real impact of a Brexit will be.

The Alternative Investment Market or AIM is the London Stock Exchange’s sub
market usually known for small companies. That said, many of the companies listed
and traded on this exchange have market values (or capitalisations) comfortably in
excess of those listed on the Main Market. I spend much time explaining this to
existing and potential new clients because the general perception of this investment
area is that it relates to tiny, high risk ‘penny share’ companies which are a few
steps from going bust. Accordingly many would-be investors simply avoid the AIM
and I would argue (in some cases) wrongly so.

Granted of the 1000 or so companies listed here, the majority are small market
value (primarily) resources companies which are illiquid (can be tricky to buy and
sell) and logically high risk. But a cursory glance at the AIM 100 index constituents
list will reveal many much larger companies and here might begin a stockpicker’s
research process. ASOS (4740p) for example, the online retailer has a market cap of
£3.9 billion which means it would be knocking on the door of the FTSE 100 if it
chose to come off AIM. Breedon Group (73p), the UK’s largest independent
quarrying of building materials company has a market value of £1 billion and would
easily be a FTSE 250 company if fully listed. There are many others.

Of these larger market cap companies, most are growing large profits (yes they make
money) and where applicable paying dividends. Most have respected long serving
management teams and established institutional investors on board. Many have
robust (lowly leveraged) balance sheets, significant net assets and many trade at
attractive valuations based on current share prices. If this sounds interesting, it
should be and that is before we even talk about the significant tax advantages that
come with being invested in this space.

To assist with cost, there is no 0.5% stamp duty payable on the purchase
of AIM shares (unlike Main listed) and they can now be held in tax free ISA accounts.
This means any capital gains made (if the shares are sold) and any income received
by way of dividends are tax free during the investor’s life. But most importantly,
“qualifying” AIM companies are also exempt from Inheritance Tax (IHT) after a 2
year holding period. This is because HMRC has classified AIM shares as business
assets and those companies that qualify will attract Business Property Relief (BPR).
It is important to stress that BPR is not available on all listed AIM shares and stock
selection is thus important to achieve all available tax breaks. Companies for

instance, must not be listed on another exchange in addition to AIM; in other words,
there must not be a ‘dual listing’. Companies must not be in financial services or be
investment companies either. Mining companies should be avoided also. In simple
terms, the qualifying company is ordinarily a vanilla UK domiciled business carrying
out a bread and butter trade utilising domestic assets. Companies available in this
regard span telecom, medical services, engineering, transport, retail and professional
services sectors. In other words there is a very decent range of companies for
potential investment.

Commentary regarding AIM investing often highlights the smaller company element
to this space and the corresponding illiquidity in the underlying shares. It describes
the area as higher risk than investing in larger, perhaps blue chip companies. While
at face value it might be easy to agree with such statements, the fact is over the
past few years, well capitalised profitable AIM companies (on the whole) have
massively outperformed the large company investment universe.

I have under my management numerous AIM portfolios which have appreciated
in value by 50% over the past few years on capital (plus dividends) and that is
before one remembers the entire account is free of IHT when the investor passes
on! To the extent that volatility and risk normally go hand in hand, good quality
AIM companies look arguably lower risk than large cap companies in my mind.

True there has been some additional stimulus which has assisted the appeal of AIM.
The capability to buy these companies within ISA environments (from summer 2013)
opened up vast amounts of private client capital which was previously only allowed
to buy collective investments (funds) or direct Main Market listed equities. It is also
fair to say that liquidity is less on AIM and this invariably means large institutions
(such as hedge funds) or leveraged market players will not get involved in this market
if indeed they are allowed to be.

By holding AIM companies within an ISA account, an individual is able to have a tax
free portfolio of stocks during life which will automatically turn into an IHT free pot
of money upon death. Infact I am spending an increasing amount of time migrating
client funds within ISAs (accumulated over many years) into select qualifying AIM
companies precisely for this reason. It is obviously important the client understands
the different (possible risk) characteristics of the underlying investments as part of
such a process.

Investing in AIM companies for IHT relief is a far simpler way for an investor to
mitigate death duties than more complex IHT strategies. Trust creation (one of the
more common approaches) can be timely, expensive and fiddly. Being a direct
shareholder in many of the UK’s leading growth companies is straight forward and
easy to understand and importantly, if an investor requires access to the invested
capital, shares can be easily sold unlike assets tied up within a trust.

While tax rules can always change over time, it seems unlikely that governments
who have only over the recent past been increasing the tax advantages of investing
in AIM will change their stance any time soon. Encouraging investment into UK plc
in such ways obviously brings corporation tax take advantages to the extent that
such companies continue to generate increasing levels of profit.