AIM stocks not only offer the potential for sharp growth but can also help you pass on assets to your loved ones in a tax-efficient way.
If you want to invest some money, there is no shortage of options open to you.
But while most of us would perhaps look first towards regular stocks and shares listed on the London Stock Exchange, it turns out a slightly different form of investing is rapidly gaining in popularity this year.
Investment broker Wealth Club has reported seeing the amount its investors have put into stocks on the Alternative Investment Market (AIM) this year has rocketed by four times, growing from £5 million in the first part of 2021 to £20 million so far in 2022.
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So what is the AIM? And why are its shares proving so attractive?
What is the Alternative Investment Market?
The AIM is a market where stocks and shares in businesses are listed, much like the FTSE.
There are currently almost 1,000 businesses listed on the index, including the likes of ASOS and YouGov.
Essentially it’s a market where you might spot the big names of the future, while they are still at an early stage in their development and have the potential to grow substantially.
The perks of investing in the Alternative Investment Market
One of the big benefits to investing in AIM stocks is that it can prove particularly tax-efficient when it comes to Inheritance Tax.
Many of the stocks on the market qualify for Business Property Relief.
This is a form of tax break which was first introduced decades ago, to make it easier for family businesses to be passed down after the death of the owner, without having to be broken up or sold in order to pay an Inheritance Tax bill.
It has been expanded significantly since then, however, to the point that now simply holding shares in an eligible business is enough to qualify for the relief.
As a result, when you pass away, you’ll be able to hand those stocks on to your loved ones, free of the taxman taking a slice.
Often, when it comes to protecting assets from Inheritance Tax, it involves you having to give up some control over that asset, but that isn’t the case with AIM stocks.
You are in charge of how and where you are investing, right up until the point you die and those investments are handed to your loved ones.
Speed is also an important point here.
If you gift a loved one something, you have to survive for seven years before it is no longer classed as being part of your estate for Inheritance Tax purposes.
By contrast, you only have to have held an AIM stock for two years before it qualifies for this relief.
There is also the potential for real growth from your AIM investments.
These businesses may be relative minnows at the moment but could become giants in the future.
After all, there have been plenty of notable AIM success stories.
Investing in the AIM market, therefore, opens you up to possibly enjoying a substantial return on your cash.
It’s also worth highlighting that you can keep AIM stocks within a stocks and shares ISA, so you can enjoy the spoils of your investments without having to pay tax.
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The downsides to investing in the Alternative Investment Market
While there have been some big success stories in the AIM, there have also been some punishing failures too, which have left investors counting the costs of big losses.
As a result, while you could see your stocks grow sharply, you could equally see some of the firms you back go out of business entirely.
A smart way to protect yourself when investing is to diversify across a host of different stocks.
That is where funds can come in so useful with regular stocks, but sadly there are no dedicated AIM funds.
While there are some funds that include AIM stock, they will also include stocks listed on other markets.
It’s also worth emphasising that not all AIM stocks are eligible for the Business Property Relief, so it can be a dangerous mistake to assume that any shares you back can be passed on to your loved ones free of tax.
What’s more, their eligibility status can change ‒ just because they qualify for the relief today, that will not necessarily be the case by the time you pass away.
As a result, if you’re backing AIM stocks for Inheritance Tax reasons, you will need to monitor their status.
Shield ALL your investments from the taxman with a Hargreaves Lansdown Stocks & Shares ISA
How to invest in the Alternative Investment Market
While the AIM is not necessarily that well known by investors, it is thankfully a fairly easy index to invest in.
Most of the big investment platforms for example allow you to invest in individual stocks in the market, or funds that include certain AIM stocks.
Shield ALL your investments from the taxman with a Hargreaves Lansdown Stocks & Shares ISA
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