Allowing alternative investment market (Aim) stocks to be included in Isas poses a risk of them looking “mainstream”, according to one adviser.
Patrick Connolly, financial planner at Chase de Vere IFA, highlighted that the risks of Aim stocks do not disappear just because they are becoming available in a mainstream product.
“I’m not against allowing Aim shares to be used in Isas, but it gives the impression they are mainstream,” he said. “This would be an investment for someone with a large portfolio who understands the risks.”
According an announcement by the Treasury on July 1, Aim stocks will be an allowable investment in Isas from the autumn. This paves the way for investors to access inheritance tax-free stocks within Isas.
Investors could be tempted to take advantage of the inheritance tax (IHT) shelter offered by the inclusion of Aim-listed shares in Isas, but it is important to approach with caution.
At a time when banks are lending less, especially to smaller companies, allowing Aim shares to be invested in through Isas is a way of encouraging investors to put their money where the banks will not.
For investors, the inclusion of Aim stocks in Isas means there is a wider range to choose from in terms of tax-efficient investment. Aim-listed shares qualify for full business property relief from IHT if all necessary criteria are met, which in theory represents a substantial incentive.
While including Aim shares in Isas and the advantage of an IHT shelter may be attractive to those looking for inheritance solutions, there can be numerous pitfalls in investing in Aim and many believe the risks outweigh the benefits of IHT-exempt Isa stocks.
The general risks of investing in shares are greatly magnified when investing in small companies, and since reporting requirements are less strict for companies on Aim, investors could be taking on more risk than they understand. The highs can be stellar – the share price of Asos, for example, increased almost 80 per cent over one year – but the overall picture of the Aim market is somewhat weak.
The high risk attached to Aim companies means investing in them is arguably only appropriate for sophisticated investors, and even then the shares should represent only a small percentage of their investment portfolio. Choosing Aim shares within an Isa is only appropriate if it fits with an investor’s objectives and approach, according to Mr Connolly.
