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TaxationWeb by Bob Fraser MBA MA FSFA

An overview of AIM and its potential tax benefits, by Bob Fraser MBA, MA, FSFA of Rensburg Investment Management Limited I suppose the first reaction individuals have when the AIM is mentioned is to shy away in horror at the supposed investment risk. However, whilst acknowledging that the AIM does constitute a higher risk investment, it is important to appreciate that the risk can be managed. It's a bit like sky-diving – risky, but the quality of your equipment and training reduces the risk.

Background to AIM

The AIM was launched in June 1995, and as at the end of Feb 05 has 1,065 companies with a total value of £37.6 billion.

The composition of the AIM is:

distribution of companies by equity market value

So you can imagine the market as a pyramid.

investment market pyramid

The bottom third of the pyramid is the domain of the small, start up companies that are battling for survival. Some will make it, others will fail. Definitely not investment grade.

The middle third of the pyramid is the domain of the venture capital trusts and enterprise investment schemes. These companies have shown the capacity for survival, and offer potential for growth. But because they have to be capitalised at under £15 million, they are not substantial companies. Investment in these companies are high risk and should only be considered through established schemes.

The top third of the pyramid is the area where institutional investors are now becoming active. These companies are capitalised at £50 million or more, and are often household names. Domino Pizza (one of the sponsors of the Simpsons on TV!) is one example. As at October 2004, the total value of institutional holdings stood at £9.75 billion, or 38.3 per cent of the market in all (source: Growth Company Investor, Oct 04). This has a number of implications. The first is that the investment-grade companies in the AIM are well researched. The second is that the institutional involvement improves the liquidity of the shares. The average value of daily share dealing in the AIM in Feb 05 was £172.5 million. (source: LSE)

At the very cusp of the pyramid is the area in which private individuals should focus. The top 9 companies in the AIM would, if they were to move to the main market, be listed in the FTSE 350. The reasons companies prefer to remain in the AIM are numerous: the lack of a restrictive financial reporting regime is one, allowing the business to focus on its core function. These top companies are very much investment grade, although they are still a higher risk investment.

Tax Benefits

The tax benefit obtained by investing in the AIM is that the investment qualifies for "business property relief", provided that the investment is made into "qualifying" companies. "Qualifying" companies are those carrying on a trade, and will exclude financial services companies, investment companies, and certain others.

This means that Business Asset Taper Relief is available to investors when disposing of qualifying AIM shares and this effectively reduces the rate of capital gains tax to only 20% for AIM investments held for a period of one year, and to only 10% for AIM investments held for a period of two or more years.

Furthermore, unlimited exemption from Inheritance Tax is available to private individuals provided that the investor has held shares in a qualifying company for at least two years. After the two year holding period, the shares should be retained throughout life by the investor and will no longer be considered part of the investor's estate for IHT purposes. This represents an inheritance tax saving of 40% under current legislation.

In the event of death within the two year holding period, the shares will be treated in the same manner as if invested in companies quoted on the Stock Exchange, in which case the share value at the date of death would form part of the investor's estate for inheritance tax purposes. However, a surviving spouse who inherited the shares would only have to survive the balance of the 2 years to qualify for the business property relief.

Because of the need for proper research to identify suitable companies, and crucially the need to invest in qualifying companies, investors really should made these investments through investment managers who specifically specialise in this area. They will construct a portfolio of shares for the investor. Rensburg is one such investment manager.

For whom is this suitable?

This tax solution is only suitable for individuals with total financial security, completely independent of any investment undertaken in the scheme.

Within that pre-condition, it can be used for individuals who wish to avoid inheritance tax and:

- Are elderly, or ill, and do not realistically expect to survive the 7 years necessary for a "potentially exempt transfer" to become effective.

- Do not wish to gift capital to their heirs or into trust during their lifetime because they feel that they may need access to the capital. The gift with reservation rules, and the new Pre-Owned Assets Tax, inhibit gifting while trying to retain access.

- Have substantial PEPs/ISAs which were bought for tax reasons. Although they may be exempt capital gains tax, they are not exempt IHT. Changing the "tax wrapper" is thus often an attractive consideration.

- Are not actively considering IHT planning, possibly because they are younger, but want an investment vehicle that offers CGT relief but which is much more liquid than either VCTs or EISs.

Past Performance

Clearly past performance may not be repeated in the future, but it is useful as a comparator to other sectors. For reference, I have provided the return on our own AIM IHT portfolio.

AIM IHT portfolio

Bob Fraser, MBA, MA, FSFA
Associate Investment Director
Rensburg Investment Management Limited

e-mail your enquiry (NOTE: potential clients only)

Bob Fraser is an associate investment director and has achieved the highest level of professional advisory qualifications in the financial services industry. He is a Fellow by examination of Personal Finance Society, which is a specialist faculty of the Chartered Insurance Institute. He also holds a Masters of Business Administration degree.

Rensburg Investment Management is the largest company in the Rensburg group and a subsidiary of Rensburg plc, a public company whose shares are quoted on the London Stock Exchange. Its core business is investment management and it currently looks after around £3.0bn of funds for private investors, trustees, charities and pension funds. It provides independent financial planning advice and investment management services to both individuals and businesses in order to meet their financial objectives. Financial planning is the process by which resources and risks are firstly identified and then used or provided for in a way which best achieves financial goals and lifestyle. It provides detailed advice to clients across the whole range of financial planning issues from the provision of straightforward life assurance, to savings and retirement planning, to complex inheritance tax planning arrangements.

Rensburg is authorised and regulated by the Financial Services Authority (FSA) whose function is to provide investor protection through the regulation of financial product providers in securities and derivatives business.
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About The Author

Mark McLaughlin

Mark McLaughlin is TaxationWeb's Co-Founder, Director and Technical Editor. He is a Fellow of the Chartered Institute of Taxation and a member of the Association of Taxation Technicians and the Society of Trust and Estate Practitioners. He lectures on tax subjects, is co-author of Tottel's IHT Annual and Ray & McLaughlin's IHT Planning, and Editor of Tottel's Tax Planning and Annual series. Mark's work has also been published in Taxation, Tax Adviser, Tolley's Practical Tax, Tax Journal and Simon's Weekly Tax Intelligence.

Since January 1998, Mark has been a consultant in his own tax practice, Mark McLaughlin Associates, which provides tax consultancy and support services to professional firms. He publishes a regular 'Tax Update' e-Newsletter for clients and other professional firms. To receive future copies, contact Mark via his website.

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