COMMENT
Aim Grows Up, Part II

By Ed Bowsher (TMFArkle)
November 3, 2005

One sign of AIM's growing stature is the fact that fund management group, New Star Asset Management, plans to list on AIM shortly with a market cap of around £600m. This will be AIM's largest flotation to date.

The problem is the government has noticed what is going on, and is considering cutting back on some of the generous tax breaks for AIM investors, according to press reports.

As things stand now, if you're a higher rate taxpayer and you invest in an AIM company (well, most AIM companies) for at least two years, you only have to pay 10% Capital Gains Tax (CGT) on any profits you make. This is known as business asset taper relief.

However, if the recent press reports are accurate, Gordon Brown may decide that investors can only benefit from this relief if the company in question has a market value of less than £100m.

As things stand now, business asset taper relief is available for AIM shares of all sizes as long as the company is a primarily a trading company.

"Trading" covers most commercial activities, but excludes investment businesses; property dealing or development; and financial businesses such as banking, insurance or accountancy.

Do not rely on the above list. If you're in any doubt about the tax status of an AIM-listed company, ask the company itself for clarification or seek professional advice.

There is one more group of AIM companies whose shareholders don't benefit from the 10% CGT rate. These are companies which are listed on a "recognised stock exchange" as well as AIM. Practically speaking, these are non-UK exchanges. Here is a full list of recognised exchanges.

The rules on recognised exchanges mean you can't get tax relief on shares in Aussie oil explorer Hardman Resources (LSE: HNR), for example. Hardman's primary listing is on Australia's ASX, so business asset taper relief is not applicable even though Hardman has a secondary listing on AIM.

There is a flipside, however. Most AIM stocks can't be included in ISAs, but stocks trading on recognised exchanges can be placed within an ISA wrapper.

CGT isn't the only AIM tax relief. You can also make big savings on Inheritance Tax (IHT). If shares in an AIM-listed trading company have been held for two years, no IHT is payable.

I've got room to highlight one final potential tax advantage for AIM investors. That's Venture Capital Trusts (VCTs). These trusts are similar to investment trusts and can invest in any company with less than £15m in gross assets. VCTs aren't restricted to AIM stocks, but some trusts do concentrate on the AIM index.

You should only consider VCTs if you're risk tolerant and you have already used up your full ISA allowance for the year.

VCTs have certainly contributed towards AIM's rising popularity in the last couple of years. Given that popularity, it's no surprise that Gordon Brown is considering changing the tax rules. You could argue that any tax changes would be a punishment for the market's success. On the other hand, Mr Brown might push AIM back to its original role a nursery exchange for smaller companies.

More: Aim Grows Up, Part I | LSE info on AIM