The Isa regime has welcomed all manner of new entrants over the past five years, often with limited levels of success. The headlines generated by the Lifetime and Innovative Finance Isas, for example, have not translated into popularity among consumers. But one introduction, less heralded at the time, has proved to be of particular significance for savers.
It’s now five years since Aim shares were first allowed to be included in stocks and shares Isas. In permitting this, the government effectively combined the tax-free wrapper with Aim shares’ own tax benefits.
Most Aim shares qualify for business property relief (BPR), which means they are exempt from inheritance tax (IHT) if they have been held for two years prior to death. This ability has become increasingly valued by investors at a time when government data shows more than £5bn in IHT receipts for the 2017-18 tax year, the figure growing at a rate of 10 per cent a year.
Danny Cox, head of communications at broker Hargreaves Lansdown, says: “[IHT] workings may be under review, but the Treasury continues to reap the dual benefits of rising property prices and frozen allowances with another year of record receipts.
“Much of the current IHT workings are complex and distort people’s behaviour and financial decisions – the system is crying out for simplification.”
Meanwhile, greater awareness of the tax-planning potential of Aim shares has boosted the popularity of a market previously viewed as an unkempt bed of speculative commodity stocks and spurious technology businesses.
The FTSE Aim All-Share index has risen 57 per cent over the past five years, according to FE, with its leading lights such as fashion retailer Asos and drinks manufacturer Fever-Tree long since becoming household names.
Put into context, however, and the performance is not quite so impressive. The FTSE Small-Cap index has increased 65 per cent over the same period, while the FTSE All-Share is up 44 per cent. For many investors this 13 percentage point difference is a small price to pay for the greater stability on offer from the main market as a whole.
Over a longer timeframe, even this difference evaporates. The FTSE All-Share has more than doubled the performance of its Aim counterpart over the past decade, as Chart 1 outlines.
Chart 1: Aim performance over the past decade
Source: FE. Copyright: Money Management
Nonetheless, in the years following the change to Isa rules, the number of dedicated Aim portfolios on offer from discretionary fund managers and advisers has risen notably.
Nero Patel, financial planning director at Canaccord Genuity, says the tax advantages remain comfortably the main reason his clients seek to invest in Aim. This only underlines the importance of recognising the volatility involved in buying such companies.
It may be that increased interest ultimately provides structural support to the Aim index – much as pension funds’ need to match liabilities is viewed by some as helping to prop up the bond market.
Richard Power, head of small companies at Octopus, says others also play a part. “These [investors] might provide a more stable long-term share register; however, the influence of BPR funds is often overplayed. The share registers of Aim companies tend to be dominated by traditional institutional investors and founders.”