David Lawrence, CEO at Kingswood Holdings looks at the benefits and the risks of the AIM market.
The Alternative Investment Market (AIM) is a sub-market of the London Stock Exchange (LSE) that has provided more than 3,800 companies with access to the public markets. Companies on the exchange have the opportunity to go public with more regulation flexibility and a smoother listing process.
AIM was started in 1995 with just ten companies. In just over a quarter of a century, the exchange has grown to be worth more than £115 billion. There are currently nearly 950 companies listed on the exchange, many of which have not been quite large enough to go through a FTSE initial public offering (IPO).
The market has been shown to provide value to investors as cash-strapped businesses have access to capital needed to accelerate growth. Today the market has never been healthier, outperforming the main market over a number of years. It has housed solid cash-generative businesses that will continue to grow over the medium to long term. There has also been a rise in good quality and successful Family office businesses moving to AIM for Business Relief, which allows small businesses to be passed down without incurring an inheritance tax liability, presenting strong long-term growth and delivering good cash flows that savvy investors could own.
The market is also appealing from a tax mitigation perspective. Investors aren’t taxed on dividends from AIM shares held in an ISA and they don’t pay any Capital Gains Tax on profits. If investments aren’t held in a tax-efficient wrapper, profits are taxed above the annual CGT allowance (£12,300 in the 2021-22 tax year). For investments held outside an ISA, the Dividend Allowance means investors can receive their first £2,000 in dividends tax-free. Dividends that are above this amount currently are charged at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers. There is also no stamp duty when trading shares on the AIM market. Most AIM stocks are exempt from IHT if they’ve been held for more than two years, and it may also be possible for AIM shareholders to qualify for the income tax and CGT reliefs (depending on circumstances) when held via an Enterprise Investment Scheme (EIS) or through CGT Entrepreneurs Relief.
There are of course risks, there is no minimum market capitalisation for companies looking to list on AIM and they also don’t require a trading record, which means a lot of the companies that join the market have only been trading for a short period of time. Share prices can be volatile so it is always worth doing plenty of research. For this reason, some investors prefer to gain exposure to smaller companies through investment funds. This is a good way of utilising the expertise of an experienced management team and investing across a wide range of stocks, diversifying the risk. Using the resources of a fund manager means they will do their own research and meet the management teams of the companies they invest in.
