By Matthew Kneller
Last August, the government announced that it would allow alternative investment market (AIM) listed shares to be held within an individual savings account (ISA) wrapper. With “ISA season” fast approaching, we thought we would look at the financial planning implications of doing this.
The AIM Market
The AIM market is the London Stock Exchange’s international market for smaller growing companies. It attracts a wide range of businesses including early stage companies backed by venture capital to more established companies all looking for growth capital.
Risks
One of the appeals of the AIM market for companies and one of the major risks for investors is that the list requirements are less strict than for the broader market. For example, businesses may only have a relatively short track record of audited accounts.
Tax Benefits
In most cases, where AIM shares have been held for two years or more, they are exempt from Inheritance Tax (IHT). By holding these shares within an ISA wrapper they are free from Capital Gains Tax (CGT) and higher and high rate income tax.
Fresh Perspective’s View
Investing in AIM shares within an ISA wrapper is inherently risky and investors should always consider the merits of the investment first and not be seduced by the tax benefits.
For an investor with an existing holding in AIM listed shares, and who wishes to retain them for the longer term, it may be worth considering holding them within an ISA wrapper, especially if significant returns are expected.
However, care needs to be taken around the practicalities of transferring AIM listed shares into an ISA wrapper. These include the costs of selling and re-purchasing the shares and in particular any dealing spread (the difference between the selling and buying price for AIM listed shares can be significant). Also, there may be risk associated with “time out of the market” between the sell and repurchase trades which could have a big impact on performance if the share price is volatile. Finally any CGT liability must be considered if there are already significant gains already built up, although this can be minimised by utilising annual CGT exemptions.
For those investors without existing AIM shares, investing into them, and the associated risks, must be carefully considered as alternatives such as investment into funds of so-called “smaller companies” may well be more appropriate to your risk profiles and objectives.
Alternatives to an ISA
Potentially using alternatives to an ISA wrapper should also be considered where appropriate. For example, comparable tax breaks can often be obtained by holding AIM shares within a Self Invested Personal Pension (SIPP).
Next Steps
To discuss your annual ISA allowance or your wider investment portfolio, please do get in touch with us on 01249 700404 or email matthew.kneller@fp-fp.co.uk
Disclaimer
This article contains the current opinions of the author and does not represent a personal recommendation. Information contained herein has been obtained from reliable sources but cannot be guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission from Fresh Perspective Financial Planning Ltd.