What are the risks and rewards of using Aim Isas?

Speaking on the ninth anniversary of the government's decision to allow clients to invest Isa money into Aim stocks, advisers have said the more esoteric Isa has proved useful to some clients.

Evelyn Partners's managing director of corporate affairs Jason Hollands said the company has been using Aim portfolios for some clients as “part of an inheritance tax mitigation strategy".

The change in Isa rules nine years ago was a real turning point for investors. Alex Davies, Wealth Club. 

Investing in qualifying Aim stocks within an Isa has the potential for those assets to be free of IHT after two years.

Aim Isas, which launched on August 5 2013, differ from other forms of IHT planning, as the holder can keep control of their money rather than having to give it away before they die.

Hollands added: "For tax purposes, Aim companies are currently regarded as ‘unquoted’ and therefore most, but not all, Aim shares potentially qualify for business relief on death.

"This is providing they have been held for at least two years and remain eligible for business relief at that time. This means they will be potentially exempt from an investor’s estate for IHT purposes."

Unicorn's Max Ormiston, who co-manages the Unicorn AIM IHT & ISA Portfolio Service, said the business had been investing in Aim since Unicorn was set up in 2000 and has seen that IHT is becoming a "bigger concern for many individuals".

"Investors have been able to hold stocks listed on the Alternative Investment Market (AIM) within a tax-efficient ISA wrapper since 2013, enabling them to gain exposure to some exciting and fast-growing British businesses, whilst also benefiting from a number of attractive tax reliefs."

Such reliefs include:

• Full exemption from capital gains tax
• Full exemption from income tax on profits realised and dividends received,
• The potential for investments to be exempt from IHT, provided they meet some strict qualifying criteria and are held upon death.

He said: "This favourable tax position has helped boost the popularity of holding Aim-listed shares by some high-net worth investors who have exhausted their IHT allowance and would otherwise be considering alternative, and typically expensive, forms of tax planning such as trusts."

Ormiston noted that HM Revenue & Customs collected the highest amount of inheritance tax in history during the 2021/22 tax year and the sums are forecast to rise to £6.3bn by 2023/24.

'Turning point'

The development of managed Aim portfolios means investors can choose Aim stocks to include in their Isa, or pick ready-made portfolios managed by professionals. 

Ormiston said his business had been investing in Aim since Unicorn was set up in 2000. He commented: "Since then we have seen the Aim market mature and the introduction of Aim Isas nine years ago was part of that journey."

According to Wealth Club's chief executive Alex Davies (pictured, above), the change to allow Aim Isas nine years ago marked a huge "turning point" for investors for both tax-efficiency and access to a wider range of investments.

Wealth Club's research on the market to date has estimated Aim Isas provide investors with access to more than 800 investment opportunities, with a total market cap of £105bn.

It would only be a small part of the client's portfolio.Paul Stocks, Dobson & Hodge

He said: “The change in Isa rules nine years ago was a real turning point for investors.

"Until then if you had built up a large Isa pot – while tax efficient in so many other ways – it was a sitting duck in terms of inheritance tax.

"There was no way around that: if you wanted to avoid IHT, you had to move your money out of the Isa."

However, he added: "Too few people know about the benefits of Aim Isas."

Need for caution

But concerns still remain around risk - and therefore suitability for clients - and regulation.

Because not all Aim stocks qualify for business relief on death, investors must be careful which assets they choose, and the caution needed means some advisers who have used them for IHT tend to do so in a small way.

For example, Paul Stocks, an adviser at Dobson and Hodge, told FTAdviser: "We use an Aim portfolio service, but even then it would only be a small part of the client's portfolio.” 

Moreover Aim has a reputation as a more speculative investment forum compared to larger exchanges, due to less stringent regulation. 

The underlying qualities of so many businesses listed on AIM are likely to ensure the long-term and dynamic growth of this market.Max Ormiston, Unicorn

One concern has been the reporting and regulatory matters of the firms are managed by a nominated adviser who is paid by the firm they supervise, possibly creating a conflict of interest. 

When Aim Isas were launched, the head of the corporate finance division at accountancy firm Crowe Clark Whitehill told FTAdviser: “The volatility of some Aim shares may make investors reluctant to hold these investments in Isas, as no relief will be available for capital losses.” 

Aim Isas' contribution to the economy

The Treasury’s 2013 decision to open up shares listed on the Aim market to Isa investors promised Aim Isas would contribute to the economy by funnelling money into smaller companies. 

George Osborne, the former chancellor, hoped that as the UK emerged from a recession Aim Isas would encourage investment into small but fast-growing companies. 

Figures from Wealth Club appear to support Osborne’s plan. 

In 2019 Aim companies contributed £33.5bn to the UK economy and supported more than 430,000 jobs, according to Wealth Club.

Jobs created by Aim companies are more productive than the national average, having an average gross value add of £77,700 per filled job, while the national average is £56,387. 

As shown in the graph, above, HM Revenue & Customs' Isa data does not break out Aim Isas, it shows that, from the end of 2020 to 2021 the market value of adult Isa holdings stood at £687bn.

As reported by FTAdviser, this is an 11 per cent increase compared to the value at the end of 2019 to 2020, which HMRC said was driven by a 31 per cent increase in the market value of funds held in stocks and Shares Isas.

Stocks and shares Isa holdings accounted for 58 per cent of the market value of Isa funds, an increase from 49 per cent in 2019 to 2020.

Ormiston added: "Tax relief aside, investing in a portfolio of AIM shares can provide attractive diversification benefits, including exposure to technology, life sciences and consumer businesses which are under-represented on the main UK stock market.

"While changes to tax relief, principally the removal of IHT exemption from Aim shares, would undoubtedly dampen the popularity of investing in Aim companies, the underlying qualities of so many businesses listed on AIM are likely to ensure the long-term and dynamic growth of this market.”

Sophia Massam is interning with FTAdviser