AIM-listed shares are finally eligible for inclusion in tax-exempt Individual Savings Accounts (ISAs) after the Treasury rubber-stamped a proposal floated in this year’s Budget speech.
Shares listed on London’s junior market were initially deemed unsuitable for a savings product aimed squarely at Joe and Josephine Public. The original idea was to protect the less sophisticated and financially literate investors from the riskier shares traded on the junior market, which is a laudable goal.
However, AIM stocks have long been allowed in self-invested personal pension schemes (SIPPS), and are other inconsistencies come to light when you take a close look at what the Treasury considers an eligible exchange for ISA purposes.
So, you could add stocks from the lightly-policed Malta, Colombo and Cayman Island stock exchanges to your individual savings account but not equities from UK’s alternative market, an exchange that includes £1.3bn valued Gulf Keystone (LON:GKP) and £3.4bn valued ASOS (LON:ASC) among its members.
The contradictions became even more apparent when you realise AIM shares that also trade on recognised bourses such as the Australia’s ASX and the Toronto exchange instantly became ISA-eligible by dint of that dual listing.
So, the lifting of the ban on AIM shares is long overdue in the opinion of many, although it is unlikely to have a dramatic effect on the savings industry, where only some 16% of the ISA market is stocks and shares driven, despite cash ISAs currently offering interest rates that are little better than stuffing the money under the floorboards, where it might at least provide some insulation and reduce heating bills.
The move does, however, open a whole world of choice to investors who use stocks and shares ISAs to protect their income and capital gains from the taxman.
Currently there are more than 1,300 UK equities eligible for ISA inclusion, but that figure has risen by another thousand or so now AIM stocks have joined the fold.
The Treasury’s decision to abandon its objections to AIM stocks in ISAs may inject some much needed vitality into a market that is meant to be an incubator for Britain’s most promising early stage companies, although the most recent update from small companies specialist Allenby Capital does indicate that the market is picking up after a slow start to the year.
The broker says £351mln of new capital was raised on AIM in May, the biggest monthly total of the year so far.
“In the first five months of 2013, £1.26bn has been raised through primary and secondary placings – essentially in line with the amount raised in the first five months of 2012,” Allenby said,
Six companies joined AIM in May, and half of these were overseas companies, indicating London’s junior market still retains its appeal to foreign companies looking to raise capital.
Will it appeal to investors, though, now that AIM shares can be tucked away in a tax-wrapper?
The enduring advice of “buyer beware” still applies (as it does to all investments). Investing on AIM is challenging on the best of days and downright toxic on the worst.
That said, not all AIM stocks are alike. The AIM 100 index contains a number of big dividend payers, and, as mentioned, several that are over the £1bn mark; ASOS, the online retailer, is big enough to challenge for a berth in FTSE 100 proper.
In fact, there are plenty of established, profitable and cash generative groups on AIM offering an alternative to the binary bet miners, junior oil explorers and biotech firms that seem to obsess the get-rich-quick brigade.
When deciding whether to invest, it is best to remember the advice of the sergeant in the TV series “Hill Street Blues”: “Let’s be careful out there.”