The Treasury confirmed that AIM shares will become permitted ISA investments in the autumn of this year. AIM (or the Alternative Investment Market) is the London Stock Exchange‘s international market for small companies. A wide range of businesses, including early stage, venture capital backed, as well as more established companies, join AIM seeking capital to fund growth. The Treasury hopes these new measures will encourage investment in small businesses.
These new rules are good news for ISA investors as it will expand the range of permitted ISA investments by an estimated 1,000 AIM shares. It will also be possible to invest previous years’ Stocks & Shares ISA (and PEP) allowances into AiM Shares.
The AIM market is home to many small, dynamic businesses with significant growth potential, and any profits would be tax-free in an ISA, but they can be very volatile with a high risk of failure and it has less regulation. it is designed for more sophisticated investors who understand the risks and can afford to accept significant falls in the value of their investment.
Potential for inheritance tax benefits
AIM shares can also have inheritance tax benefits. Certain AIM shares benefit from Business Property Relief (BPR) which provides an IHT exemption once the shares have been held for two years. Therefore investors holding these shares in their ISA for the two-year qualifying period should benefit from virtually no taxes while they hold the share, and no potential inheritance tax liability.
Generally AiM companies which are involved in property development or investment business do not qualify for business property relief and would therefore not benefit from the IHT exemption.
Remember though you should always consider the investment merits first and look at the tax benefits as an added bonus, not a reason to invest.
The value of tax shelters will depend on individual circumstances, and tax rules can change over time.
If you are interested in investing in smaller companies, but do not want to choose and then monitor individual shares, you can buy funds investing in AIM shares in your ISA.
Two of my favourites are the Marlborough UK Micro-Cap Growth and Cazenove UK Smaller Companies funds. If you’re considering an investment in either of the mentioned funds please ensure you read the individual Key Investor Information Documents which contain details of the risks involved.
Grow your wealth tax-efficiently with ISAs
If you’d like to find out more about ISAs, how they can help you grow your wealth, and how they can save you tax, visit the ISA section of the Hargreaves Lansdown website.
The government plans to introduce the necessary legislation in July 2013 and it is expected that this will take effect shortly after, probably Autumn 2013.