In July 2013 Sajid Javid, then economic secretary to the Treasury, set out rules that would allow AIM shares to be held within stocks & shares ISAs as part of the government’s efforts to stimulate investment into UK small and medium-sized enterprises (SMEs) and jumpstart the economy.
It was a change that offered significant benefits to investors too. Not only could they get access to some really interesting fast-growing companies not previously available in an ISA, but the added bonus of three tax benefits in one: 100% income tax and capital gains tax relief, as well as a route to pass on the ISA free of inheritance tax (IHT), providing the investments qualify for business relief and the investor has held the shares for at least two years when they die.
But as we reach the 10th anniversary, just how popular have AIM ISAs been?
While more and more people have taken advantage of their ISA allowance, the majority of this has been invested in cash ISAs and mostly main market stocks & shares ISAs. Over the past decade, the value invested in ISAs has increased over 75% to an estimated £687bn, of which 58% is held within stocks & shares ISAs.
But over the same 10-year period, the ISA amount invested in the whole AIM Market has grown at a much slower rate. With a total AIM market value of £97bn, the amount invested in AIM is only 57% higher than in July 2013. Further, over that time, the size and shape of the AIM market has also changed with the number of companies listed on AIM decreasing by 25%.
The data also shows that the tax advantages of AIM ISAs remain largely unused despite government incentives. HMRC data from 2021/22 shows that business relief, which would include AIM shares and shares in private businesses, was used by 2,820 estates, a drop in the ocean when you consider that on average 23,000 estates have exceeded the IHT threshold in recent years. Also, over 7 million ISA holders are aged over 65, yet the use of AIM shares to mitigate a potential IHT liability remains low.
So why has AIM remained a less-used tool in the UK’s financial planning kitbag? AIM stocks – which are typically fast-growing companies – are higher risk and performance can be volatile. This was particularly true of 2022, which proved a difficult year for AIM.
However, that it is possible to generate good investment returns over time. Companies we seek out, for example, often have revenue lines built patiently over many years and deliver good cash flows that can be recycled into further growth.
And there are now far more mature companies on the AIM market. This maturity has been recognised too by institutional fund managers. There is now a higher level of institutional ownership from UK equity funds often looking to the AIM market for growth ideas. In the technology sector, 85 software companies are listed on AIM, in contrast to the scarcity of technology companies listed on London’s main market.
AIM has had a number of success stories over the past 10 years – AB Dynamics, a global supplier of automotive testing products, listed on AIM in May 2013 with a market capitalisation of £14m at a share price of 86p. Today its shares are valued at £17.80. Its employee base has grown from 50 to 400 over the decade.
It is important to note that investments in UK equity funds or investment trusts, even if invested solely in AIM companies, would not qualify for the inheritance tax relief. The investor must own the shares directly under business relief rules rather than held as part of a basket in an equity fund or investment trust.
But do I really need to be concerned about IHT? Only 4% of UK deaths result in an Inheritance Tax charge, yet HMRC’s IHT receipts have ballooned to a record £6.1bn in 2021/22, which was up 14% on the previous year.
With a freeze to the IHT nil-rate band until 2028, combined with inflation, it would be reasonable to expect the proportion and value of estates that are liable for an IHT charge to rise much further.
The extended freeze of the nil-rate band is going to bring IHT into scope for a larger proportion of households. As such, we expect AIM, subject to any changes to tax legislation, to be an increasing useful tool in people’s tax planning kitbag.
This can only aid further the continuance of AIM’s maturity over the next 10 years by providing capital to AIM-listed businesses that further enables some excellent smaller UK businesses to grow.
Joseph Cornwall is an investment manager at Puma Investments. The views expressed above should not be taken as investment advice.