Aim investments have a lot to offer

As Nigel Ashfield, managing director of Time Investments, says in Intelligent Partnership’s Adviser’s Guide to Business Relief: “Care costs continue to loom large in the minds of older people.”

Offering 100 per cent inheritance tax relief after two years, investing in shares that qualify for Business Relief (BR) is an increasingly popular way to support some of the UK’s most exciting businesses while also protecting and passing on wealth after death.

Aim is much more volatile than the FTSE

To qualify for BR, shares must be in companies that are not listed on a major stock exchange; however, the Alternative Investment Market (Aim - the London Stock Exchange’s junior market) does not count for these purposes and therefore an investor needs to consider the potential of this market.

The decision to invest in Aim shares will be a matter for each individual investor, aided by proper support and advice, as there are pros and cons to both approaches to BR.

Perhaps one of the most obvious attractions of Aim is the fact that companies quoted on the exchange have to meet certain corporate governance rules, which have recently been strengthened.

This offers a level of transparency in the due diligence process that may not be found in unlisted companies, giving a certain amount of comfort to investors about the robustness of the companies they are investing in and making the investment process quicker and cheaper, allowing managers to diversify across a greater number of investees more easily.

Having said that, these rules cannot prevent companies going bust, and while they can reduce the risk of bad practices taking place, again these cannot be completely ruled out just because a company is listed on Aim.

Nonetheless, because Aim is an exchange, there is much greater potential for shares to be traded than is the case for unlisted companies.

While Aim is considerably less liquid than the main FTSE market, an average of £5bn-worth of trades were made per month during 2019, with around 570bn shares traded over the year.

Another benefit of investing in Aim-listed companies is the ability to wrap Aim shares within the tax-free environment of an Isa.

Investing in Aim can also give investors access to companies with activities outside the UK.

As Brexit rumbles on, the potential to invest in companies whose futures may not be affected by the UK’s relationship with the EU has become increasingly attractive - whether that is firms with international operations or organisations in the UK whose specialisms are unlikely to be significantly affected by Brexit.

Notwithstanding this opportunity to diversify out of UK-derived incomes, one of the downsides of Aim is the overall number of companies from which investors can choose.

There are now less than 900 companies quoted on the market and not all of those will qualify for BR.

“Since HMRC does not provide a definitive list of eligible companies, a big challenge is ensuring our clients have a diversified portfolio,” explains Walker Crips investment manager Chris Murphy in Intelligent Partnership’s 2019 Aim Industry Report.

Another notable downside of Aim is its sensitivity to market sentiment.

Aim is much more volatile than the FTSE, leading some investment managers to argue that it is not appropriate for older investors, whose money may need to be accessed in the relatively short term (albeit after at least two years).

In reality, of course, BR is generally considered a long-term investment, and so short-term volatility in the market may not be such an issue - plus it can be even more tricky to accurately value unlisted stocks, as essentially they are only ever worth what someone is willing to pay for them.

As unlisted companies generally have fewer shareholders, BR managers’ voices can be heard more easily and in many cases they will have a seat on the board, giving greater control.

Finally, it is important to bear in mind when considering whether to invest in Aim that the majority of BR offers on the market have pure growth strategies, rather than focusing on wealth preservation.

That means these products are likely to involve more risk than those following wealth preservation strategies, and so the individual investor’s desires need to be carefully considered.

Paul Jarvis is senior editor - financial services at Intelligent Partnership