The government has announced its intention to allow Alternative Investment Market (AIM) shares in Individual Savings Accounts (ISAs) later this year.
The necessary legislation to allow this to happen is expected to be introduced later this month, with AIM shares becoming a permitted ISA investment in the autumn.
The same rules will be extended to Junior ISAs and Child Trust Funds.
Is this really a good idea?
On one hand, it does raise the possibility of an inheritance tax free ISA as Business Property Relief will still be available on AIM shares within an ISA.
As things stand, ISAs are very tax efficient for income and capital gains, but less so in terms of inheritance tax on death.
In fact, there are some circumstances where elderly investors are better off losing the income and capital gains tax advantages of an ISA portfolio and instead holding the money outside of the tax wrapper to benefit from inheritance tax planning.
Apart from the estate planning possibilities, it is important to understand and consider the risks of investing in AIM shares.
The Alternative Investment Market is a sub-market of the London Stock Exchange, catering for smaller companies who want to float shares within a more flexible regulatory system than that applied to the main market.
It launched in June 1995 and has raised £24bn for over 3,000 smaller companies.
AIM shares can be risky by virtue of their smaller size and because of the lighter tough regulation applied to the market.
US securities regulator Roel Campos criticised AIM in 2007 for creating a market like a “casino”, suggesting that 30% of issuers that list on AIM will be gone within a year.
The London Stock Exchange argues that closer to 2% of AIM companies typically go into administration or liquidation each year.
AIM has also been criticised for allowing Langbar International to be listed. This turned out to be the biggest share fraud on the exchange to date, at £375m.
Research carried out by Investors Chronicle in 2011 found that AIM shares had massively underperformed the FTSE Small Cap Index, despite higher risks.
They concluded that AIM shares carried the wrong sort of risk; unrewarded risks that you cannot insure against.
AIM shares also carry high levels of liquidity risk, which is likely to make them unsuitable for most retail investors who want the ability to realise their investment holdings reasonably quickly.
It’s good news and a positive development that the government will allow AIM shares within ISA portfolios.
For experienced, higher net worth investors and those where inheritance tax planning is a clear priority, AIM shares within an ISA portfolio could be worth exploring in more detail.
For the vast majority of retail investors, they represent an unnecessary risk and should probably be avoided.
