May 2003

PRIVATE INVESTORS SHOULD AIM HIGH FOR EFFICIENT TAX PLANNING

As planning ahead for your financial future becomes increasingly important, there is a case for private investors to turn to the Alternative Investment Market (AIM) to reap the rewards of generous tax incentives. Andrew Bain, senior tax manager at Acumen Accountants & Advisors Limited in Aberdeen, explains how AIM can be used by investors and their advisers for efficient tax planning.

The AIM is the London Stock Exchange’s global market for smaller growing companies and more than 850 have been admitted since its creation in 1995. It provides a platform for companies to enjoy the benefits of a public listing and a means to trade shares and attract finance. The AIM is often seen as a potential stepping stone to a full listing on the London Stock Exchange and includes well-known Aberdeen companies such as Aberdeen Football Club, Dobbies Garden Centres and energy and oil service business Ramco.

Private investors can purchase AIM shares direct or own AIM shares indirectly through Venture Capital Trusts (VCT’s) or Investment Trusts set up with the specific purpose of investing in AIM shares. The government is encouraging investment in AIM securities and VCT’s by offering very generous tax breaks in exchange for investors taking extra risk.

For private investors wishing to own AIM companies directly through shareholdings, these companies are increasingly becoming a real part of their investment landscape because these listed or "quoted" securities are treated as unquoted for taxation purposes, providing various potential tax deferrals and reliefs. AIM shares are classed as ‘business assets’ and qualify for the maximum rate of 75% capital gains tax taper relief if held for two years, giving an effective capital gains tax rate of 10% for a higher rate tax payer. AIM shares also generally qualify for 100% business property relief, which means there is no inheritance tax on the value of the investment, provided it is held for a minimum two year period.

Investors who are the original subscribers for shares traded on the AIM can in certain qualifying cases receive income tax relief of up to £150,000 in any one tax year at 20%. This is called Enterprise Investment Scheme relief or EIS. There is also no capital gains tax charge if shares for which EIS income tax relief has been given are disposed of at a profit after a three year retention period. The interaction between AIM VCT’s and EIS is complex but these are genuine tax saving opportunities.

Another possibility is owning shares in a VCT. Tax breaks in owning a VCT are similar to owning an EIS investment. An added feature is that VCT’s have government approval to invest in AIM companies. Investors in VCT’s receive income tax relief of up to £100,000 in any one tax year at 20%. Gains arising from the disposal of VCT shares are also exempt from capital gains tax.

VCT and EIS have traditionally been viewed as viable investment solutions for the wealthy, but entry levels for these schemes are coming down and therefore opening up to a wider investor audience. For example, anyone with capital gains or 40% taxable income to shelter can also access these schemes.

With generous tax breaks on inheritance, income and capital gains taxes, investing in a company that is listed on the AIM should be seriously considered in terms of successfully complementing an existing investment portfolio. Whilst there are some very good companies listed on AIM with sound balance sheets, good management and a profitable business, there are also companies that would be best avoided. Investors and their advisors need to be streetwise and know their way round company accounts. They also need to be patient, because AIM investing is medium to long term.