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.