On the whole, AIM shares are treated just the same as those on the Main Market, in that income generated through dividends is taxable, and gains are subject to Capital Gains Tax (CGT). However, there are number of favourable tax reliefs that the UK government have implemented to encourage investment in smaller growth companies through the FTSE AIM Market, which we cover in this article on AIM tax benefits.
Individual Savings Allowance (ISA):
To kick things off, AIM shares can be held within an ISA, thereby encouraging longer-term investment by providing shelter from Income Tax (IT) and CGT. Without this, profits accruing from an investment above the annual CGT allowance – which in the 2018-19 tax year is £11,700 – would be taxed at the standard rate of 10%, with the higher rate being 20%.
Not only this, dividends received are also exempt from tax within an ISA. Whilst individuals receive their first £2,000 in dividends tax-free, any dividends beyond this would typically be charged at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers, and 38.1% for additional rate taxpayers.
Considering that the maximum ISA allowance for 2018-19 remains at £20,000, the opportunity to hold AIM investments in an ISA can prove highly tax-efficient.
Seeking to further incentivise investment in UK SMEs, the UK Government in 2014 improved the appeal of stocks listed on the AIM Market by making them exempt from the 0.5% Stamp Duty Reserve Tax (SDRT). This tax is automatically collected on the purchase of shares settled electronically, and only due on transactions over £1,000 on non-electronic settlements.
The positive impact stemming from the abolition of this tax has fortified demands for its removal from the Main Market.
Inheritance Tax (IHT) Relief:
Business Property Relief (BPR) was originally designed to enable family businesses to be passed on without creating an Inheritance Tax liability, whereby assets have to be sold to pay for the tax.
Notably, its use has since widened to cover unquoted shares – a status AIM-listed companies possess. As such, providing the shares have been held for two years, many AIM investments are able to benefit from BPR, meaning that they are 100% exempt from Inheritance Tax.
It is worth pointing out that the two-year qualifying period does not mean that one has to hold the shares of a specific company for two years, as the shares of one qualifying company can be replaced with the shares of another qualifying company.
But which companies qualify? Unfortunately there is no definitive list of which companies qualify for Business Property Relief, largely due to the qualification status of a company easily changing over time. For instance, non-qualification would apply to a company that is being sold or wound up, as well as a company with dual trading on a recognised overseas exchange. Non-qualification also applies to companies who mainly deal with securities, stocks or shares, land or buildings, or in making or holding investments.
To make matters more complicated, it is the company’s status at the date of death that dictates whether or not relief will be given. As such, it is advised that you contact the company directly for confirmation, and periodically check to ensure your investment remains eligible.
AIM Venture Capital Trusts (VCTs):
Alternatively, one could invest via a AIM Venture Capital Trust (VCT). This is a company whose shares trade on the London Main Market, but who make money by investing in other companies.
In order to be approved as a VCT, at least 70% of investments after three years must be in qualifying unquoted companies. Due to AIM-listed companies still possessing the status of being unquoted, this means that VCTs are a great way to gain access to a professionally managed portfolio of qualifying AIM companies.
In terms of tax benefits, investing up to £200,000 in a tax year entitles individual investors to the following tax reliefs: exemption from tax on dividends; exemption from CGT on disposal of shares in the VCT; and 30 per cent initial income tax relief on the amount subscribed for – providing the shares are held for five years.
Always Seek Professional Advice:
It should go without saying that the underlying investment is always more important than the associated tax relief, and that whilst I have carefully researched and collated the information contained, I am by no means a financial adviser and I would always recommend seeking professional advice before making any investment decisions.
That said, I hope that this guide has gone some way to making clear the large number of opportunities available to lower your tax bill through a portfolio of AIM company investments – be it through your own portfolio, or through the different dedicated AIM portfolio services mentioned above.
Please make sure to also refer to this document on AIM tax benefits put together by the London Stock Exchange Group and RSM.