A decade of the AIM ISA: The advantages and the risks
This month marks 10 years since AIM shares could be held within the tax efficient ISA wrapper. How has the trading platform fared overall since its inception in 1995?
AIM – formerly the Alternative Investment Market – was launched in 1995 as a sub-market of the London Stock Exchange for fledgling companies to access cash without the regulation and cost associated with a full market listing.
It has grown from 10 firms with a total market value of £82m to 852 companies with a combined market cap of circa £135bn. Nine of the biggest companies are valued at over £1bn each.
And it also boasts big household names including Boohoo, FeverTree and Jet2, helping to shake off its ‘Wild West’ reputation following earlier company collapse and accusations of a lack of regulation.
In August 2013, the Government changed the ISA rules to allow AIM shares to be held within ISAs for the first time, encouraging investment into smaller companies to jumpstart the economy.
At the same time, the ISA initiative meant AIM shares were potentially free of income tax, capital gains tax, and inheritance tax after a couple of years, “one of the most generous sets of tax reliefs available to UK investors”, according to Wealth Club.
However, when it comes to performance, the FTSE AIM All Share Index, comprising all AIM stocks, has delivered a relatively modest return of 21% over the past 10 years to the end of July.
According to Interactive Investor, it has underperformed relative to the FTSE 100 (71%) FTSE All Share (71%) and the S&P 500 (288%).
And over five years, the FTSE AIM All Share index has underperformed – down 25% in contrast to the positive return from the FTSE 100, FTSE All Share and S&P 500 (20%, 18% and 81% respectively).
But at its peak in 2021, AIM was by far the best performing UK index, outperforming many of the world’s major markets.
However, over the past year to the end of July 2023, the FTSE AIM All Share has fallen 16% compared to a positive return of 8% for the FTSE 100, 6% for the FTSE All Share and 7% for the S&P 500, II revealed.
Lee Wild, head of equity strategy at the investment platform, said: “Investors have used AIM companies to gain exposure to hot themes that the main market doesn’t offer, and to take advantage of various Government tax reliefs.
“Ownership of AIM and smaller company stocks will be back in fashion at some point, and investors with a long-term view will likely consider them as a small part of a diversified investment portfolio.”
Risk vs rewards
Investing in AIM stocks via an ISA wrapper means any growth or income on your money is tax-free.
AIM shares can also potentially qualify for Business Property Relief (BPR) for inheritance tax (IHT) purposes, though not all automatically qualify for this relief as certain criteria needs to be met.
To qualify, they need to be shares in a trading company or a holding company of a trading group, and the company’s activities should be primarily trading (rather than investment or non-trading activities).
Interactive Investor explained: “If an investor holds qualifying AIM shares for at least two years before their death, those shares may be eligible for 100% relief from IHT. This means that they would not be included in the taxable estate for IHT purposes, effectively reducing the inheritance tax liability”.
AIM shares are also exempt from stamp duty.
Nicholas Hyett, investment manager at Wealth Club said back in 2013, 30% of the top 50 companies were speculative oil & gas or mining companies, whereas today energy stocks account for just 6.5%, with none of the £1bn companies in this sector.
This is good news for investors in terms of benefitting from the AIM market’s potential for IHT relief.
“Shares in oil & gas and mining companies don’t qualify for BPR relief – which is what entitles investors in many AIM-quoted companies to IHT relief after two years. But secondly, these more mature, often dividend-paying, businesses have the potential to deliver attractive long-term returns.
“Of the eight companies that have kept their places in AIM’s 50 largest companies since 2013, seven paid a dividend in 2013 – not at all common on AIM now or then. And all have delivered returns far in excess of the wider market. In fact, we think dividends are a good sign of quality when investing in smaller companies generally, and particularly on AIM. They indicate profitability, cash generation and a shareholder-centric view that is supportive of long-term returns,” he said.
But tax relief incentives aside, AIM shares aren’t without risk, particularly due to their volatile nature.
Myron Jobson, senior personal finance analyst at II, said: “Investing in smaller companies comes with higher risks. These firms may be more susceptible to economic downturns, market volatility, or operational challenges. Smaller companies might not have the same level of transparency or regulatory oversight as larger, more established companies – making it more difficult for investors to assess their financial health accurately. Smaller AIM-listed companies may not receive as much analyst coverage and media attention, making it challenging for investors to access comprehensive information.”
He added that like with any investment, it’s crucial for investors to conduct thorough research and understand the potential risks before investing in the AIM market.