How to invest in Aim stocks (and save thousands on inheritance tax)

The Government’s decision to freeze tax thresholds until 2028 means that many more families will face an inheritance tax (IHT) sting over the next five years as their estates are dragged into the net.

According to official forecasts, between 30,000 and 50,000 deaths will incur an IHT liability every year until 2028 while the thresholds are frozen. 

One way to reduce your risk of paying the 40 per cent levy is to invest in shares from small firms that are considered “free from IHT” by HM Revenue and Customs – if you’re willing to take a bet on these underdogs. 

Firms listed on the Alternative Investment Market (Aim) qualify for Business Property Relief. This means if you have an IHT liability, then there is a potential 40 per cent saving for every £1 invested, as long as you hold the shares for two years or more. 

As an added bonus, in 2013 then economic secretary Sajid Javid allowed Aim stocks to be held within a Stocks & Shares Isa. This means these small- and mid-cap stocks are free from income tax and capital gains tax as well as IHT when held in an Isa, creating a potential triple tax saving for investors. 

What is Aim? 

Aim is a sub-market of the London stock market set up in 1995 to help small- and medium-cap firms raise funds. There are just over 800 companies with shares listed on Aim, compared to almost 1,100 on the main market. 

Nicholas Hyett of investment firm Wealth Club said: “Over the longer term, many of those small firms have gone from corporate minnows to household names – companies like Dominos Pizza, student housing provider Unite Students, and Ladbrokes owner Entain all started out on Aim.” 

Of those listed on Aim, 18 companies have market caps of over £1bn – the largest of which is video game developer Keyword Studios – however the vast majority are tiny, with a median market cap of just £397m. 

Jason Hollands of investment firm Bestinvest said: “Unlike the main market, which is skewed to more traditional sectors like energy, consumer staples and financials, Aim has much higher exposure to growth sectors. 

“Notably, whereas technology represents just 1 per cent of the FTSE All Share Index, it makes up 13.5 per cent of the FTSE AIM All Share Index.”

He added: “Unlike large and mid-cap stocks on the main market, which are typically covered by multiple research analysts from investment banks and stock-broking firms, Aim is very under-researched. 

“This makes it an opportunity for experienced and professional investors – but low levels of scrutiny also make it a bit of a minefield, too.”

Why are Aim stocks risky?

The cost of listing on Aim is lower than it is for the main market, and the requirements are also less onerous. 

To list on the London Stock Exchange’s main market, companies must have existed for at least three years, be willing to float a minimum of 25 per cent of their share capital, and produce a full prospectus that has to be vetted and approved by the Financial Conduct Authority. 

By comparison, company owners on Aim can retain a large shareholding in their company if they wish, are only required to produce a light-touch admission document and also report less frequently. 

These regulatory freedoms are a boon to company owners, but from an investor perspective, they mean the companies are a riskier bet than those listed on the main market. 

Mr Hollands said: “There have certainly been a number of significant successes on Aim, such as Fevertree Drinks, but there have also been a number of blow-ups over the years, such as ScotOil Petroleum, Patisserie Valerie and drinks wholesaler Conviviality. 

“You really need to know what you are doing when investing directly in Aim shares, as it is important to be super selective.”

How has the market performed?

Last year, Aim did terribly – falling 21 per cent as investors shunned small, high-growth companies. These tend to underperform when interest rates are high, as their borrowing becomes more expensive.

However, Mr Hyett said the headline poor performance masks some strong results from individual companies on Aim. 

“Budget airline Jet2, for example, returned 15 per cent in the last 12 months and more than 800 per cent over the last 10 – illustrating once again that Aim is very much a stock picker’s market.” 

Even if an investor’s Aim portfolio falls in value, the money you invest is still protected from IHT, so some may decide it is worth the risk. 

Investing in Aim shares for the IHT benefit may be a particularly good idea for older savers, who may fall foul of the seven-year rule on IHT if they gift large sums directly to their family. 

However, not all Aim companies qualify for Business Property Relief; most mining, oil and gas and property companies are excluded. 

It can also be difficult to work out whether or not a company is eligible. There is no centralised list for which companies qualify. “Eligibility can also be lost if, for example, a company moves its shares from Aim to the main market, or it gains a secondary listing on a recognised overseas exchange,” Mr Hollands said. 

This is why many investors choose to invest in a professionally managed portfolio, rather than choosing Aim stocks themselves. Another advantage of investing in a portfolio is the in-built diversification, which saves you having to pick socks from a range of sectors and geographies yourself. 

Mr Hyett recommends RC Brown AIM IHT Isa and Unicorn AIM IHT Isa, which both hold around 25 to 40 stocks. Note that you will pay a charge to the fund manager. The annual management charge for the RC Brown IHT Isa is 1.25 per cent, and for the Unicorn AIM IHT Isa it is 1.5 per cent. 

Tips for picking Aim stocks 

If you decide you do want to pick the shares yourself, then here are some top tips for finding Aim winners:

Look for companies that pay a dividend

Dividends are a sign that a company is generally profitable and cash-generative. Mr Hyett said: “We’re not talking about whopping great dividend yields here – there aren’t many of those around on Aim anyway – but even the smallest regular dividend payment is a sign of quality, in our view.”

Check whether founders continue to a hold a significant number of shares

Long-established Aim companies, like pub chain Youngs & Co Brewery and Vimto manufacturers Nichols, are good examples of companies where the founders are major shareholders themselves. This suggests they are more likely to act in the long-term interests of the business, rather than fixate on short-term goals. 

Steer clear of natural resources exploration companies and drug discovery companies 

“These companies are big one-way bets on striking lucky – and unless you’re an expert in the field it’s unlikely you’ll have any insight into which company is most likely to discover the next big oil field or ground-breaking cancer treatment,” Mr Hyett said.