Over 3,800 companies have listed on the Alternative Investment Market (AIM) since it launched in 1995, collectively raising more than £109bn. There are currently nearly 950 companies listed on the AIM.
Recent listings include cake shop chain Cake Box Holdings, and Tekmar Group, provider of subsea technology and services to the offshore wind and oil and gas industries. But the AIM’s biggest constituent by market capitalisation is online retailer ASOS, which has proved to be one of the AIM’s greatest success stories since it listed on the market in 2001, although at times its investors have endured a very bumpy ride.
The main appeal of adding these fast-growing, often dynamic smaller companies to your ISA portfolio is that, if you’re lucky, you might just be investing in the next big thing. What may be a minnow now could potentially develop into the next big growth story in a relatively short period of time. Of course, the reverse could also happen – an AIM company you consider to be a hidden gem could end up being worthless in a matter of months. Over the years, hundreds of companies listed on the AIM have failed, so investors must be prepared for the fact that they could see their investment disappear.
Tax advantages of holding AIM shares in an ISA
You won't be taxed on dividends from AIM shares held in an ISA, nor will you have to pay Capital Gains Tax (CGT) on any of the profits you make. If your investments aren't held in a tax-efficient wrapper, you'll be taxed on profits above the annual CGT allowance, which in the 2019-20 tax-year is £12,000. The standard CGT rate is 10%, while the higher rate is 20%.
Dividends received in ISAs are also exempt from tax. If investments are held outside an ISA, the Dividend Allowance means that individuals receive their first £2,000 in dividends tax-free, but any dividends above this amount will be charged at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers. There is also no stamp duty on shares traded on the AIM whether or not they are bought in an ISA.
Find out more about key tax rates, limits and allowances
There are other tax advantages for AIM investors, whether or not they hold their shares inside or outside an ISA. Most AIM stocks are exempt from inheritance tax (IHT) if they’ve been held for more than two years, and depending on individual circumstances it may be possible for AIM shareholders to qualify for the income tax and CGT reliefs when held via an Enterprise Investment Scheme, or through CGT Entrepreneurs Relief.
Remember that the value of tax relief and tax-efficient accounts depends on your personal circumstances. Please be aware that the level and basis of tax can change. These changes may affect both future opportunities and your existing arrangements.
Understand the risks
There are plenty of risks involved in investing in AIM companies, so this type of investment is not for the faint-hearted. There is no minimum market capitalisation for companies looking to list on AIM and they also don’t require a trading record, which means many of the companies which join the market have only been around for a short period of time.
When smaller companies run into trouble their share price can suddenly plummet, making them an extremely volatile investment. It is therefore worth doing plenty of research if you are considering investing in an AIM company, so that you fully understand the businesses or businesses you are investing in. Smaller company shares are also more illiquid too, with less people willing to buy them, particularly when times are hard. This means that they can be difficult to sell when you want and at the price you want.
For this reason, many investors prefer to gain exposure to smaller companies through investment funds, rather than buying individual shares. These provide the expertise of an experienced management team and your money is invested across a wide range of stocks, which helps to diversify risk. Fund managers also have the resources to do their own research and meet the management teams of the companies they invest in.
If you are not sure what to do with any AIM holdings you have, or whether this type of investment is right for you, seek professional independent advice.