New ISA tax break could boost share prices
Shares in the AIM index, which comprises more than a thousand companies, will soon be eligible for a Stocks and Shares ISA. And AIM investors can avoid inheritance tax too!
The AIM index is normally seen as the most dangerous part of the London stock market. Most of the companies on the index are pretty small, and many operate in risky business areas such as exploring for new gold deposits or developing biotech drugs.
Because the risk is seen as high, most AIM shares aren’t eligible for Stocks and Shares ISAs. That’s in contrast to shares on London’s ‘main market’ which can easily be placed in an ISA. Shares on some overseas markets are also eligible for ISAs.
However, all this is now set to change. The Government wants to encourage investing in smaller companies and has announced that AIM shares will soon be eligible for ISAs – probably from September. This means that owners of AIM shares no longer need pay Capital Gains Tax or income tax on dividends, as long as the shares are sheltered within a Stocks and Shares ISA.
Other taxes
This week’s news follows an announcement earlier this year that AIM share transactions won’t be subject to Stamp Duty from next year. That will save investors a 0.5% charge every time they buy AIM shares.
What’s more, most AIM shares are already potentially exempt from Inheritance Tax. If a shareholder dies and has held his AIM shares for at least two years, the estate doesn’t have to pay any Inheritance Tax on those shares. However, this Inheritance Tax exemption doesn’t apply to AIM companies which are involved in property development or investment.
However, for most AIM shares, the range of tax breaks on offer is now pretty amazing.
As Danny Cox, from Hargreaves Lansdown, points out: “Investors holding these stocks in their ISA for the two year qualifying period should benefit from virtually no lifetime taxes, and no death taxes either.”
Share price boost
The other interesting aspect of today’s news is that it may boost share prices on the AIM index which is good news for current investors.
The Government says that around £391 billion is held within ISAs, of which over £190 billion is in Stocks and Shares ISAs. Currently all the companies in the AIM index together are worth around £52 billion, and as Killik Stockbrokers points out, only a small amount of the £190 billion need be transferred to AIM stocks to deliver a significant fillip to share prices.
The effect of moving just £2 billion over to AIM shares could be surprisingly large because many AIM shares are lightly traded. When you have a share that is relatively ‘illiquid’ a relatively small increase in demand can trigger a big rise in the share price.
Risk
That said, I wouldn’t advise most people to transfer a big chunk of their savings into AIM shares. Granted, some AIM shares have been hugely successful – Asos and Majestic Wine spring to mind – but many other AIM shares have peformed poorly. Indeed a fair number have gone bust. Investing in the AIM market is a high-risk game.
Alternatives
If you fancy putting some of your money into up and coming, smaller UK companies, you might do better investing in a fund that focuses on smaller businesses. I particularly like two investment trusts that invest in this end of the market – the Throgmorton Trust and the Standard Life UK Smaller Companies Trust.
Just note that these trusts don’t purely invest in AIM-listed stocks and as they’re funds, they won’t benefit from all the tax breaks I’ve looked at in this article. Still, at least you can put them in an ISA.
More from Lovemoney:
The UK’s best Stocks and Shares ISAs
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