Do-it-yourself
investors received a boost this week as the Government removed a long-standing
restriction on holding London Stock Exchange AIM-listed shares in Individual Savings Accounts
(ISAs). Now, for the first time,
investors with the confidence to pick individual shares for their ISAs are able
to invest in companies listed on the London Stock Exchange’s (LSE) Alternative
Investment Market (AIM).
The prohibition on
holding London AIM-listed shares in an ISA never made much sense because there was no
restriction on holding them in a Self-Invested Personal Pension (SIPP). An investor could get the same tax advantages
by putting their London AIM-listed shares in their SIPP while using their ISA allowance for
investment in companies listed on the London Stock Exchange’s Main Market.
The London Stock Exchange's AIM has always
been popular with do-it-yourself investors because it offers them a chance to
get in on the ground floor, investing early in dynamic growth companies that
might rise in value many times over. The
potential rewards are high but that means the risks can be too.
Those risks were
one of the reasons the Government kept London AIM-listed shares out of ISAs until now. But its desire to ensure that SMEs have
sufficient access to funding means it is now happy to ease up a bit on investor
protection. It sees London AIM investors as a
potential source of the cash that banks are still loath to provide.
So now we are able
to invest in companies such as Majestic Wine, ASOS and many other less
well-known London AIM-listed companies in our ISAs.
“Can” is not the same as “should”, though.
So what are the
pros and cons of the new rules?
Firstly, the
latest move actually makes London AIM-listed shares one of the most tax-advantaged of all
investments. In most cases, they are
already exempt from inheritance tax.
From next year, London AIM investors won’t have to pay the 0.5% stamp duty on the
purchase of London AIM-listed shares. And the new
rules now add income tax and capital gains tax exemptions to the list of
benefits.
So investing in
individual London AIM-listed shares makes sense from a tax perspective but should investors
really be picking London AIM-listed investments for themselves? What are the risks of London AIM investing?
The principal
concern is that the company listing requirements on London's AIM are less strict than on the
Main Market. For example, London Stock Exchange AIM-listed companies can get
away with a shorter track record of audited results. That makes London's AIM attractive for young, unproven
companies but can increase the risks for investors.
London's AIM has also
tended to attract a fair proportion of small companies in the riskier
technology or natural resources areas of the market. Again, this can mean potential gains but a
significant risk of loss too. For some
London AIM investors, that is a chance they are happy to take, perhaps with just a small
proportion of their overall portfolio.
The London Stock Exchange's AIM is investing that’s red in tooth and claw.
The winners, such as ASOS, up from 3p in 2003 to £50 recently, have made
fortunes, however, there have been big losers too.
I think it is only
fair that investors can now invest in London AIM-listed shares in a tax-efficient way. But they need to keep their eyes wide open.
