Investors have poured £5 billion into the Alternative Investment Market (AIM) in the first half of 2006 but many will not qualify for the generous tax breaks that have made London’s junior market so popular.
Stocks in some firms listed on AIM attract inheritance-tax (IHT) relief — the shares become exempt from the 40% IHT charge once held for two years. Shareholders may also benefit from a lower rate of capital-gains tax (CGT) than those who invest in mainstream companies.
However, many savers fail to realise that not all AIM-listed firms get the exemption. They therefore face an unexpected tax bill if they get it wrong.
Neil Pamplin of Grant Thornton, an accountant, said: “The lack of clarity on reliefs means that some investors could be playing Russian roulette with their investments, not knowing for sure if they are eligible for tax relief even when submitting their self-assessment forms.
“There is a need for more guidance from Revenue & Customs to enable individuals to make informed investment decisions.”
One of the main areas of confusion surrounds overseas firms. As a general rule, companies do not qualify for the generous tax breaks if they are listed on another exchange. There are, however, some exchanges, such as the Berlin-Bremen bourse, that trade shares in AIM-listed companies without the firms’ consent. Firms traded in this way will generally still qualify for the tax breaks.
Andrew Buchanan, who runs AIM funds for Close Investment, said: “The rule is that if a company is listed on an exchange included in the Revenue & Customs list of trading exchanges, it will not qualify for the usual tax breaks.”
Accountants are concerned that more investors will fall foul of this rule because overseas companies are increasingly choosing to list on AIM. Of the 1,560 companies on AIM at the end of last month, 277 were foreign — and the market has already attracted 71 international floats this year.
The junior London market has become the leading destination for smaller US firms because of stringent regulations back home. Companies based in countries including India and Australia have also been flocking to the market.
Investors who buy shares in Berkeley Resources, an Australian miner that recently announced plans to come to AIM, will not qualify for the tax reliefs because it is also listed on the Australian stock exchange. Those holding shares in Eros International, a Bollywood firm, may also hit problems, although shareholders in Majestic Wine, the off-licence chain, would qualify as things stand.
However, buying stock in a British AIM-listed company does not guarantee you will qualify for either CGT or IHT relief. Shares in businesses that engage in “substantial” non- trading activities, such as property and finance, are not generally eligible for the lower CGT rates or the IHT relief available to other AIM investors.
The CGT relief can have a big impact on your bill: when you sell shares in a firm listed on the main market, your CGT rate falls to 24% after 10 years, assuming you are a higher-rate taxpayer. Trading companies on AIM are considered unquoted for tax purposes, so the tax drops off much more quickly — from 40% to 10% after just two years of ownership.
Daltry said: “For companies to qualify for accelerated CGT relief, they must be a trading group of some kind. A property investment firm would not qualify, for example, because its main interest is in buying property and making money by renting it out, rather than trading.
“It is also a problem getting IHT relief on non-trading companies. That’s basically because Revenue & Customs wants to prevent people putting their assets into a company, listing it on AIM, and avoiding paying IHT that way.”
Accountants are calling for further clarification of this, especially because a recent Revenue & Customs announcement classifying “substantial” as more than 20% of the business did not explain whether that was 20% of turnover, earnings or assets.
Investors should also be careful if their AIM stock is taken over by another firm or graduates to the main market itself, because it would no longer qualify for the generous tax breaks.
Advisers suggest that, if you want to make sure you get the tax breaks, you ask a professional to select a portfolio on your behalf. Collins Stewart recently launched an actively managed AIM portfolio, joining the likes of Brewin Dolphin, Christows, Rensburg and Smith & Williamson.
The minimum investment ranges from £30,000 to £100,000. The schemes invest in a portfolio of stocks, typically between 15 and 30, and tend to pick from the less risky end of the AIM spectrum.
The services can be expensive, though. Close charges an entry fee of 6% and an annual charge of 1.75% on top of dealing costs.
And remember that AIM shares are a big gamble because smaller firms tend to be harder hit in difficult markets. They have fallen 18.6% since the market peak in May, compared with 4.5% for the FTSE All-Share, for example. If your shares fall more than 40%, you have wiped out any IHT benefit.
There is also no guarantee that Gordon Brown, the chancellor, will not scrap IHT relief on AIM shares altogether, a move that would spark a big sell-off.
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