The tax relief the Government provides on savings in ISAs was worth an estimated £2bn in 2012/2013, with this figure rising year by year – a considerable cost to the Treasury during a period of fiscal austerity.

From 5 August 2013, new ISA rules allowed people to invest directly into small trading businesses listed on the Alternative Investment Market (AIM). These changes form part of the Government’s commitment to help smaller companies succeed by promoting investment to deliver sustainable economic growth.

Economic Secretary to the Treasury Sajid Javid stated at the time: “The ISA rules will allow small to medium sized enterprises to access another source of funding and follows the Budget announcement to abolish stamp duty on shares traded on growth equity markets. Together these changes will make investing in small to medium sized enterprises more attractive and boost growth”.

There can be little doubt that this change will indeed benefit SMEs – over 1,000 companies listed on AIM will now be eligible for direct ISA investment.

The more interesting and pertinent question, however, is whether the change is as interesting or as beneficial for investors.

The changes have certainly widened the range of eligible shares and by definition has improved consumer choice.

Of particular interest is that some AIM listed companies qualify for business property relief (BPR) and as a result once held for two years within the ISA will be exempt from inheritance tax (IHT).

This on the face of it provides a utopian investment. An opportunity to invest for returns not only exempt from income tax and capital gains tax, but also where the entire investment can be free of IHT after two years.

However, a few words of warning:

• The share price of companies on the AIM market are traditionally more volatile than shares listed on the main exchanges,

• AIM shares are less established companies with the consequential higher risk of failure,

• There are potential liquidity issues, particularly in difficult markets and this has been exacerbated by the demand already generated as a result of the new rules,

• Not all AIM shares qualify for BPR, which will further limits the market place when it comes to finding and holding quality companies, and

• Because not all AIM shares qualify for BPR and some may lose their qualifying status, the investor may not benefit from the IHT exemptions that he or she believes or expects.

Investors should be clear on their investment objectives. If they have accumulated significant sums within an ISA on the basis of a need or desire to accumulate capital, the income and capital gains tax (CGT) benefits are clear. However, if the investor’s priorities change and/or move to that of IHT mitigation the dynamics change.

If the ISA is to be maintained until the investor death the CGT benefits largely disappear and if the investor is a basic rate taxpayer or the portfolio is paying little in the way of dividends the same is true of the income tax benefits.

This leaves the investor restricted to a small pool of BPR qualifying AIM shares, with the issues highlighted above in order to keep their ISA which now provides little in the way of practical tax benefit outside of IHT.

While I understand the emotional attachment investors can have to their ISA, without wishing to mix metaphors ‘beware of a Government bringing gifts’.

An AIM portfolio within an ISA may be right for you but go into it with your eyes wide open and take advice.

Tony Mudd is divisional director, development & technical consultancy at St James’s Place.