With so many businesses now providing AIM-based inheritance tax solutions, Jack Rose offers some pointers on how investors and their advisers can set about choosing between them
The Alternative Investment Market - ‘AIM' for short - is one of those markets that divides opinion. Some investors believe in the high-growth investment opportunities to be found on AIM and appreciate the generous tax benefits available. But others avoid AIM due to horror stories surrounding individual company failures and the relatively poor performance of the headline FTSE AIM All-Share index over the 21 years since its inception.
So which view is correct? The short answer is that both are valid. The poor performance of AIM is well documented. Since inception, the FTSE AIM All-Share index has returned -2.41% on an annualised basis - hardly stellar returns - and it is true the regulation and requirements for companies seeking a listing on AIM are less onerous than for companies on the main stock exchange.
There is a far more positive side to the AIM story, however, and it deserves to be heard. Part of the rationale behind the less onerous regulatory framework was to create a more flexible environment in which smaller, less mature companies could raise growth capital. Since its launch, the AIM market has helped more than 3,500 companies to raise capital through listing on the index.
AIM continues to enjoy the support of the UK government, in recognition of the stimulus it provides to capital funding and employment creation. As a result, the tax benefits of investing in AIM can be attractive for private investors.
Many of the businesses listed on AIM do not receive the same level of analyst research and broker coverage given to companies listed on the main market. For investors willing to sift diligently and carefully through the opportunities, there are some real gems to be discovered.
Success stories such as Numis and Abcam are just two examples of tremendous AIM-listed companies, which can be highly rewarding investments if you have the time and resource to unearth them. Numis now has a market capitalisation of around £250m and has returned well over 7,500% since it first listed.
Probably the most effective strategy for investing in AIM is to delegate responsibility to a professional fund manager with the experience, expertise and resources to identify opportunities on behalf of their investors, thereby helping to mitigate some of the risk.
AIM investing for IHT planning
So, if it is best to leave the stockpicking to the professionals, what products do they offer for private investors? Attractive government legislation has been key to supporting investment into the AIM market - especially the rule changes of 2013, which for the first time allowed investment in AIM stocks through an ISA.
This rule change opened up the market for specialist providers to manage assets that had previously been inaccessible. There are more than 22 million ISA account holders in the UK, which represent more than £500bn in total assets - a significant opportunity.
Additionally, inheritance tax (IHT) is a growing issue for many people. To put this in context, IHT receipts have increased 60% in the last five years with a record £4.7bn taken in IHT receipts last tax year. Investing in AIM-listed companies that qualify for business relief - the government legislation that affords them IHT relief - can provide a welcome solution for investors.
There are more than 20 different providers offering AIM-based IHT solutions, giving investors plenty of options. But with so many providers offering access to a similar service, how should investors and their advisers decide between them?
Obviously, cost is an important consideration and it is essential to look at all the charges, including any dealing and custodian fees that could be levied. I would suggest, however, that looking for managers with a long track record of investing in and managing AIM portfolios should be the most significant consideration.
Does the manager have a robust investment philosophy? How well-resourced is the investment team? How much experience in AIM investment do they have and how long have they managed AIM portfolios?
Although past performance is no guarantee of future performance, managers who have managed AIM portfolios over multiple market cycles should give greater confidence in their investment approach. A track record in managing tax-advantaged portfolios is key, as the rules around these structures can be complicated. It is also important to be able to demonstrate an investment track record in AIM (either in a tax structure, or outside one).
For those considering tax-advantaged products, there are several independent research sources which review providers and can provide due diligence, including The Tax Shelter Report, The Tax Efficient Review and MiCap.
Finally, as with most investments, diversifying across several providers can help to spread and reduce investment risk.
Jack Rose is head of tax products at LGBR Capital
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