The government has announced new ISA rules that will make it easier for people to invest directly into small businesses.
The changes, due to come into force in the autumn, will simplify direct ISA investment in small and medium sized businesses (SMEs) and provide savers with a tax efficient way to hold shares traded on SME markets.
More than one thousand companies listed on the Alternative Investment Market (AIM) will now be eligible for direct ISA investment.
Currently, ISA investors have only been allowed to directly invest in shares listed on recognised stock exchanges.
Widening the range of eligible shares will improve consumer choice for ISA investors, the Treasury said.
The changes will mean that an individual saver could invest up to £11,520 in the current tax year directly into SME equity markets within their ISA and any gains arising from the growth of the investment would be tax-free.
At the end of 2011-12 the market value of adult ISA holdings stood at £391bn, over £190bn of which was in stocks and shares ISAs.
The tax relief that the government provides on saving in ISAs was worth an estimated £1.75 bn in 2011-12.
This change should also benefit SMEs with shares quoted on markets that do not currently qualify for ISAs.
At a time when many SMEs are looking for alternative types of finance, it is hoped the new rules could provide a major capital injection for SME equity markets and encourage investment in growing businesses.
Under current rules, over £190bn of the £391bn invested into UK ISAs are held in existing stocks and shares ISAs.
Economic Secretary to the Treasury, Sajid Javid, said: "The government is determined that small businesses are given every opportunity to fulfil their potential. We want the UK to be the best place to start and grow a business. Central to achieving that is access to finance.
"We are fulfilling our commitment. Today's changes to ISA rules will allow SMEs to access another source of funding and follows the Budget announcement to abolish stamp duty on shares traded on growth equity markets. Together these changes will make investing in SMEs more attractive and boost growth."
However, Danny Cox of Hargreaves Lansdown has urged caution: "AIM shares can be very volatile and smaller companies generally are higher risk than the so-called blue chips, therefore investors should be aware of the risks.
"Investors should choose stocks or funds which are suitable for their investment approach and objectives and not just for the tax benefits."
Cox says that the alternative to investing in AIM is to go for a fund which invests in smaller companies such as Marlborough Micro Cap or Cazenove UK Smaller Companies fund.
These funds can be held in an ISA but would not qualify for an inhertiance tax exemption.
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