Exploring various tax advantages of Aim

In the main, according to Danny Cox, chartered financial planner for Hargreaves Lansdown, Aim shares are treated the same as other company shares, in that dividend income generated is taxable, and gains are subject to capital gains tax.

However, holding Aim shares within an Isa or a self-invested personal pension, Mr Cox says, ensures there will be no additional UK income tax or CGT liability for the individual.

As previously mentioned, since 28 April 2014, purchases of direct shares in Aim stock are also now free from the 0.5 per cent stamp duty payable on all UK shares, which removes one potential tax barrier for investors considering this market.

But apart from their inclusion in an Isa wrapper and the lack of stamp duty, there are various other tax reliefs available that could make Aim interesting to investors seeking a tax-effective way of putting equities into their portfolios.

Richard Power, head of smaller companies at Octopus, explains: “Aim-quoted companies are deemed to be unquoted companies by HM Revenue & Customs because they are not quoted on a recognised investment exchange, therefore making them eligible for a range of tax benefits.”

VCTs

For example, investments in new subscriptions to Aim venture capital trusts (VCTs) will benefit from 30 per cent income tax relief, as well as ongoing capital gains tax and income tax relief.

To be approved by HMRC as a VCT, the investment vehicle must, after three years, be at least 70 per cent fully invested in qualifying unquoted trading companies, which include Aim stocks.

According to HMRC, investments in VCTs of up to £200,000 in a tax year mean individual investors will get 30 per cent initial income tax relief on the amount invested (up to £200,000) in new ordinary shares issued by VCTs, as long as they hold the shares for five years.

They will also receive a tax exemption on dividends and will benefit from no CGT on disposal of shares in the VCT.

The investor does not need to be a resident of the UK in order to benefit, but he or she must be a UK taxpayer.

EIS

According to Richard Hallett, director at Hargreave Hale and manager of the firm’s Aim Inheritance Tax service, enterprise investment scheme shares (EIS) also qualify for upfront income tax relief, loss relief, and CGT relief.

To benefit from the 30 per cent upfront income tax relief for an EIS, individuals must subscribe for new ordinary shares in Aim companies which qualify as trading companies.

HMRC clarifies that qualifying investments up to £1m in aggregate in a tax year (a husband and wife may each invest £1m) will give investors 30 per cent initial income tax relief on investments.

For investments in qualifying shares made in a particular tax year, any part of the investment may be treated as made in the previous tax year.

Relief is restricted to the actual income tax liability for the year, if lower than 30 per cent of the cost of the investment.

To benefit from exemption from capital gains tax on disposal of Aim shares in an EIS, the investment must be held for three years. Initial relief must not be withdrawn and the exemption will be restricted if initial relief was not given on the full amount or if that amount has been reduced.

BPR is an extremely valuable relief and provides 100 per cent exemption from IHT. Clive Garston

Investors can also defer assessment of capital gains tax on other gains by reinvesting those gains in subscriptions for new ordinary shares in qualifying companies.

Loss relief can also be claimed by investors, if the investment fails or is disposed of at a loss. This is calculated at an investor’s top rate of tax on the net loss, after taking the initial tax relief into account

Losses can be relieved against: capital gains in the year of loss; in the subsequent year; against income in the year of the loss; or the previous year.

Therefore, the maximum net loss can be restricted to 35 per cent of the cost to an investor.

Business Property Relief

Some Aim stocks, and investment vehicles investing in Aim - such as enterprise investment scheme (EIS) - also qualify for business property relief (BPR).

The BPR means that after a two-year holding period there is an inheritance tax exemption on their value. Clive Garston, consultant for law firm DAC Beechcroft, says: “This is an extremely valuable relief and provides 100 per cent exemption from IHT.

“The reason why BPR applies to Aim companies is because they are treated as being unquoted. The investment must be held for two years and only applies to qualifying companies.”

At the time of the investor’s death, provided the two-year minimum is met, then the investments will be exempt. Currently, IHT is set at 40 per cent of anything above the £325,000 nil rate band threshold.

It should be noted these tax benefits are eligible for companies and investments which meet specific criteria, rather than available for all investments into Aim-listed companies. Therefore it is important investors seek professional advice before making undiscerning investments across Aim.

Yet while IHT has been a lure for some people when it comes to estate planning, this tax perk may only apply to the higher net-worth, and not for the average or mass market investor.

Speaking on the 20th anniversary of Aim in 2015, Patrick Connolly, certified financial planner for Chase de Vere, said investing in Aim shares would only be suitable for those prepared to accept the risk and that “while Aim shares can provide relief from IHT if held for two years, for most people, the investment risks will outweigh the tax benefits”.

However, some providers have portfolio services which combine the Isa tax breaks with BPR, allowing people to hold their Isa portfolios in an IHT wrapper.

Chris Hutchinson, manager of the Unicorn Aim VCT, says: “This can be particularly attractive for older investors who have accumulated large Isa portfolios over the years. There are more than 6m Isa investors over the age of 65, according to latest HMRC statistics.”