Benefits of investing in AIM – the Alternative Investment Market

Investing in the Alternative Investment Market (AIM) can be an effective way to mitigate the impact of inheritance tax on your estate. Holdings in AIM shares attract 100% Business Relief (BR) once they have been held by an individual for two years or more. This means that after the two-year period, the total value of holdings in these shares falls outside of the remit of IHT.

To help you understand AIM (also known as the Alternative Investment Market), why it can be a good way to mitigate your inheritance tax (IHT) liability and the risks to be aware of, Investment Manager Peter Bottomley answers the questions he’s most often asked.

What is AIM?

AIM is the London Stock Exchange’s market for small and medium size companies. Since its inception in 1995, the market has grown to become the world’s most successful market for high-growth companies.

During this time, over 4,000 innovative entrepreneurial companies, representing many different countries and sectors, have raised more than £122bn on AIM, supporting smaller companies to attract the capital they need for expansion.

What are the tax benefits of investing in AIM shares via an IHT portfolio?

1. It can reduce your IHT bill
   Investing a portion of your assets in the right AIM-listed stocks can notably reduce your potential IHT bill, as it reduces the value of your estate that’s assessed for IHT.
2. The holding period for qualifying for the relief is only two years
   This compares favourably to making gifts, which do not fall entirely out of your estate until seven years after the gift has been made.
3. The benefit is not dependent on staying invested in the same company
   If an asset that qualifies for business relief is sold, the BR is maintained if the proceeds are used to purchase a new business asset that also qualifies. This doesn’t reset the two-year qualifying period. The two-year period is also not reset if qualifying assets are passed on death to a spouse or civil partner.
4. You maintain control of your assets
   Using BR to reduce your inheritance tax liability has the additional benefit that you’re not giving away your assets – they remain in your name, under your control.
5. Stamp duty and ISAs
   There’s no stamp duty reserve tax to pay when investing in AIM shares and they can also be held in a tax-efficient ISA wrapper.
6. Investment growth potential
   While the AIM market tends to experience more volatility than other markets, investing in AIM can also enable investors to take advantage of a dynamic market of growing businesses, in some cases offering the potential for significant returns on investment.

Is investing in AIM high risk?

Investing in AIM-listed stocks does come with some notable risks, such as:

• AIM is home to many small, early-stage companies with a much higher risk of loss of value or even bankruptcy
• Financial disclosure from AIM-listed companies can be a lot lower and less-timely than on the main market
• Not all companies listed on AIM qualify for BR
• Although there are many large, well-known companies listed on AIM and many with long pedigrees of generating strong financial returns, it’s a less regulated market than the main FTSE ones
• As a less liquid market, share price volatility is high, which normally suggests that a long investment time horizon is needed to smooth returns
• Tax treatments and reliefs can be changed at any time by the UK government. While BR has broadened in scope over the years, it’s no guarantee that the current reliefs will be maintained

Investing in AIM requires periods of patience and an ability and willingness to sit tight through periods of high levels of volatility – and if you’re not an expert then it’s very important to have the right guidance. While not suitable for everyone, investing in AIM can be a rewarding and tax-efficient way to mitigate your liability for IHT.

What kind of companies are listed on the AIM market?

Today, there are 813 companies listed on AIM –  many of them well-established, successful enterprises. FeverTree Drinks plc, Hotel Chocolat Group plc, and Jet2 plc are just some of the more familiar household names that call AIM their home, and there are over 200 companies now capitalised north of £100m.

Furthermore, despite recent negative market movements, there are over 15 companies listed on AIM that have a market value over £1bn, which would place them comfortably in the FTSE 250 index.

There are many AIM companies which have grown to be world leaders in their respective fields. Below are just a few examples that are likely unfamiliar to you, but you may well have used their products or services without ever realising it.

• GB Group plc – a global software company which focuses on identity verification, digital location, and fraud prevention. Its technology powers customer onboarding in industries such as banking and gaming, as well as address verification in e-commerce. As an example, anyone who has ever had their identity verified and documents authenticated while opening a Revolut account may have used GB Group’s technology.
• Keywords Studios plc – a global video games company that provides content creation and support services across the full lifecycle of video game creation and development. They serve 23 of the top 25 largest global video games companies in the world, including Microsoft and Netflix.
• RWS Holdings – the world’s largest language service provider, translating content in over 250 languages. Its customers include 90 of the top 100 global brands, including many of the mega technology companies, and its services are often used during new global product releases to translate supporting product information, instructions and legal/warranty information.  

How do you select the companies included in your IHT Portfolio?

Adam & Company’s IHT portfolio invests in a diversified range of established, profitable companies chosen from AIM, where we adopt a pragmatic and disciplined approach, and where each stock goes through a rigorous process before we will invest in the company. Our selection criteria for AIM companies includes, but is not limited to:

• Profitable business
• Cash generative
• Strong balance sheet
• Ability to pay progressive dividends
• Proven track record
• Simple and scalable business model
• Strong financial and operational controls
• Established market position
• Experienced and committed management
• Sustainable and predictable growth

From here we look to construct a portfolio of between 25-40 companies that we consider to be the ‘best on AIM’ – i.e., those that are capable of delivering the best risk-adjusted returns for clients on a sustainable basis. We focus on established, profitable companies with a demonstrated track record.

Are there any sectors within AIM that you do not invest in?

At Adam & Company we tend to avoid the more speculative areas of AIM, such as mining, oil and gas, commodity exploration and biotechnology companies.

If you would like to find out more about investing in AIM, you can request a complimentary initial consultation with a personal Wealth Manager.

Our expertise in AIM investing

Using a service from an investment specialist such as Adam & Company can help reduce these risks. In the Adam & Company IHT service to date we have not had any clients’ claims for BR on their AIM-listed stocks rejected. This is because we carefully screen companies before investing in them and take outside advice where needed.

We also use the research capabilities in Adam & Company and across the wider Canaccord Genuity Wealth Management group to screen out the highest risk, non-profitable companies and from this subset of the market, select companies that are well-funded, well-managed and with good prospects to grow over the longer term. So, investing in AIM may not be suitable for all individuals, but currently it can undoubtedly be a useful tool to help with one of those two certainties in life: death and taxes.

You may also be interested in:

• Whole of life cover: The 'secret' inheritance tax mitigation tool 
• Planning for long-term care costs: myth busting 
• IHT Portfolio Service

This is not a recommendation to invest or disinvest in any of the companies, themes or sectors mentioned. They are included for illustrative purposes only.

Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. It is not suitable for everyone.

This service should be regarded as high risk, as it is exclusively focused on equities. The portfolios are wholly invested in small capitalisation stocks. These companies are therefore more volatile and, while they can offer great potential, growth is not guaranteed. It is important to note that this should be seen as a long-term investment.

The current inheritance tax rules and tax treatment of AIM shares may change in the future. We strongly recommend that clients discuss their financial arrangements with their tax adviser before investing, as the value of any tax reliefs available is subject to individual circumstances.

Specific risks of the IHT portfolio service investing in AIM-listed companies include the potential volatility and illiquidity associated with smaller capitalisation companies. There may be a wide spread between buying and selling prices for AIM-listed shares. If you have to sell these shares immediately you may not get back the full amount invested, due to the wide spread. AIM rules are less demanding than those of the official list of the London Stock Exchange, and companies listed on AIM carry a greater risk than a company with a full listing. The current inheritance tax rules and tax treatment of AIM shares may change in the future. In addition, you must be prepared to hold your shares in AIM-listed companies for a minimum of two years or these assets will be considered part of your estate in the IHT calculation.