Jeff Salway: Taking aim at alternatives is riskier

Your aim has to be good if you want to make proper use of the alternative market warn experts. Picture: TSPL
Your aim has to be good if you want to make proper use of the alternative market warn experts. Picture: TSPL
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Two decades on, AIM is thriving but it’s not without its drawbacks, writes Jeff Salway

Two decades after it first opened the alternative investment market AIM) is more popular than ever among investors seeking to cut their tax bill.

“[The AIM market is a] uniquely useful venue for specific kinds of companies and investors”

Amanda Forsyth

Inheritance tax (IHT) savings have proved particularly appealing, experts say, but investors in fledgling companies have been warned not to overlook the risk of hefty losses.

The FTSE AIM Index was opened on 19 June 1995 and was made up of just ten companies worth a total of £82 million when it went live in January 1996. The index now comprises 1,704 companies with a combined market cap of more than £75 billion, according to accountant and business adviser BDO.

More than a fifth of the firms on AIM are now international, alongside just 26 from Scotland (including Celtic FC, Smart Metering Systems, Bowleven and Scotgold Resources).

While the tax advantages of investing in AIM firms ensures demand for AIM exposure is buoyant, performance remains volatile. The index is still 24 per cent below its starting point in January 1996, over which time the FTSE 100 and the FTSE 250 have risen in price by 82 and 344 per cent respectively.

The market has evolved over 20 years into a “uniquely useful venue for specific kinds of companies and investors”, according to Amanda Forsyth, investment manager and AIM specialist at Edinburgh-based Murray Asset Management.

What hasn’t changed is that, compared with more established options, investors are taking on a heightened risk when investing in AIM firms. There are few disclosure requirements, liquidity – when stocks can be difficult to offload – can be a problem and while the main FTSE market requires that firms must have traded for at least three years to be listed, no such demand is made of prospective AIM constituents.

“The companies are, in general, riskier than those listed on the main market; attracted by the relatively easy and low-cost way of raising capital, they need not provide a trading record prior to float, or even allot a prescribed proportion of their share capital to be available to the public,” said Forsyth.

But investors able and willing to take that risk can benefit from several tax perks. For instance, business property relief (BPR) allows for AIM shares held for more than two years and which meet particular criteria to be held outside the individual’s estate for IHT purposes.

There are limitations, however, not least that the relief isn’t available on collective funds investing in AIM.

“The rules are complex as to what does and does not qualify for BPR, and this is certainly an area where it can be worthwhile paying a professional manager to select stocks that are likely both to qualify for relief and also to at least maintain their value over time,” said Forsyth.”

Shares in companies listed on Aim have, since August 2013, also qualified for inclusion in tax-efficient Isas, and months later became exempt from the 0.5 per cent stamp duty on share purchases.

“In theory an investor could in due course have a portfolio which qualified for relief from income tax, capital gains tax and inheritance tax,” Forsyth pointed out.

Those benefits mean AIM is increasingly used more for tax reasons that for pure investment returns. A growing number of funds and investment trusts offer ordinary investors access to AIM stocks, often as part of broader small company products.

“AIM is well represented in the likes of Marlborough Special Situations, Schroder UK Dynamic Smaller Companies and Threadneedle UK Smaller Companies, where the managers have the capacity to broaden their investable universe,” said Forsyth.

But putting money in AIM-listed companies purely for tax breaks often lures investors into “inappropriate” investments, warned Tom Munro, owner of Tom Munro Financial Solutions. “AIM investing in my view is not for the average investors. In the many cases I have come across, it was evident that the ‘tax tail was wagging the investment dog’ and whilst I agree the tax breaks are generous, the high risks associated with investing in start-up companies seldom compensates,” said Munro.

That includes AIM funds, he added, even if they’re less risky than investing directly in AIM stocks.

“While it is true that the majority of start-up companies may have been well-run even if many were ultimately unsuccessful, the AIM market has never really recovered from recent blows to its reputation, and I don’t think the sector will really regain the trust of retail investors,” he said.