ISAs set to hold AIM shares from the autumn

The rules governing Individual Savings Accounts are to be changed so they can hold the shares of small and medium-sized listed companies from this autumn, the Treasury announced yesterday.

Unveiling a boost for both savers and firms alike, the department said an individual investor could soon put in up to £11,520 in the current tax year into AIM and other SME equity markets (including those in Europe) within their ISA.  

And because the AIM shares will be covered by the ISA’s tax-efficient wrapper, any gains for the saver arising from the growth of the investment will be tax-free.

As a result, the government is claiming that it is providing savers with more tax-efficient choices as, until now, it was seen as too risky to let ISA users directly invest shares in anything other than recognised stock exchanges.

The state can also claim to be handing the enterprise community a fresh source of finance and support, given that more than 1,000 companies listed on the AIM will soon be eligible for direct ISA investment.

But while financial advisers say AIM houses many dynamic businesses with significant growth potential, they also caution that the companies can be “very volatile with a high risk of failure.”

The warning yesterday, from Hargreaves Lansdown, is aimed at novice investors, likely to be enticed by the fact that any profits would be tax-free in an ISA, and the possibility that previous years’ stocks and shares ISA allowances can be invested into AIM shares.

The adviser’s warning is in line with its previous alert that using an ISA to hold AIM shares “won’t suit everybody,” even though they can potentially lead to significant inheritance tax benefits.

“Certain AIM shares benefit from Business Property Relief (BPR) which provides an IHT exemption once the shares have been held for two years,” explained Hargreaves Lansdown’s Joel Lewis.

“Therefore investors holding these shares in their ISA for the two-year qualifying period should benefit from virtually no taxes while they hold the share, and no potential inheritance tax liability.

“Remember though, you should always consider the investment merits first and look at the tax benefits as an added bonus, not a reason to invest.”

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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