Under the bonnet: The Alternative Investment Market – it’s a relief

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    Under the bonnet: The Alternative Investment Market – it’s a relief

    When Charles Dickens wrote, “It was the best of times, it was the worst of times,” as the opener to ‘A Tale of Two Cities,’ he was talking about the tumultuous era in London and Paris during the French Revolution. Interestingly the same sentiment could be used to refer to the stock markets in 2022. The index of UK small companies, the FTSE Alternative Investment Market (or AIM) Index, fell 38% from an all-time high at the end of 2021*. Truly one of the worst of times for this asset.

    AIM started in 1995 with ten companies but by the end of December 2022, there were 816 companies in the AIM index, with a total market value of approximately £93 billion**.

    Many companies in the AIM market qualify for a tax advantage called Business Relief which can mitigate Inheritance Tax (IHT). IHT is assessed at the point of death, and the amount payable is dependent on what the deceased holds at that time; it is usually paid at 40% of the amount by which an estate exceeds the ‘nil rate band’ (NRB). The NRB is currently fixed at £325,000 per person***.

    To mitigate IHT, an investor may hold AIM shares instead of the big-name companies. For comparison, if the investor holds BP shares and passes away, 40% of the value of the shares may be payable to the tax man, with their next of kin retaining only 60% of the value at death.   Should the investor hold a qualifying AIM share, no tax is payable at all.

    Like large company shares, AIM shares can be held in an ISA and so there are no capital gains tax on any profits and there are no taxes on any dividends received.

    Care needed

    Given their nature, AIM companies will always be more volatile than those in the broader, main indices (such as the FTSE 100). These are young companies with little track record, are generally growing fast and can be susceptible to failure. There is also the issue of ‘liquidity,’ i.e. relatively small purchases or sales tend to move the share prices more than the larger stocks and this results in out-sized movements in the shares both up and downwards.

    It should be noted that Business Relief does not apply to all companies on this market. For example, the relief is intended to promote investment in ‘trading companies’ but if regular, commercial companies build up large cash holdings, this may mean that the companies do not qualify since cash does not count as a trading activity.

    No relief, no problem

    We are sometimes asked, usually around the time of the Chancellor of the Exchequer’s Budget, what would happen to the value of the AIM companies if Business Relief was withdrawn? Would the potential sales by Business Relief investors mark the end of AIM or at least steep losses for AIM stocks?

    Firstly, this would be an odd move given this relief supports a significant proportion of new growth companies and a large swathe of employees in the UK economy.

    In addition, significant institutional investors often invest in these companies in their own right, without entitlement to any tax benefits, and would not be selling (indeed likely be buying) because of the underlying attractions of these businesses.

    Making a strategic long-term investment in these companies during their early stages, irrespective of tax breaks, is a sensible decision as they are on track to represent the next generation of the UK’s biggest corporations.

    Best of times?

    The weak period of performance in 2022 was very challenging for AIM investors. The AIM market hit very low valuations last year. However, outside investors started to recognise this undervaluation and there were a number of bids from overseas companies and private equity investors.

    Looking back, the AIM market had a large fall in 2008/9 when it declined by 58%, but in the following two years, the Index returned 138%. In the Covid market fall of 2020, the market fell by 32% and by the summer of 2021, the market had nearly doubled*… you get the picture. Like the individual shares in the market, the index is prone to being oversold and whilst there are no guarantees in stock investing, these periods are usually followed by large bounce-backs. For those looking to invest in AIM stocks, buying after a period of weak performance could present one of the best opportunities.

    Our solution

    The Equilibrium AIM Portfolio is our solution for clients looking to access the tax advantages of AIM stocks. This diversified collection of 30 stocks, ranges from drinks companies to software engineers and is managed for our clients on a discretionary basis. Clients can hold the portfolio in a general account or take advantage of the tax-free benefits of an ISA account and there is no minimum investment.

    There are no initial charges, exit charges or dealing charges. Even better, the Equilibrium AIM Portfolio does not cost any more in management charges than holding one of our core funds, making the choice seamless.

    If you would like to find out more about this service, please don’t hesitate to contact us. If you’re a client you can reach us on 0161 486 2250 or by getting in touch with your usual Equilibrium contact. For all new enquiries please call 0161 383 3335.

    This blog is intended as an information piece and does not constitute a solicitation of investment advice.

    The value of your investments can fall as well as rise and are not guaranteed.



    *All market data from FE Analytics.


    ***Tax rates applicable at time of writing.

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