AIM listed shares to be permitted in an ISA

The Treasury announced on 1 July that new ISA rules will allow for people to invest directly into small trading businesses which are listed on the Alternative Investment Market (AIM). These rules are likely to apply from the autumn.

The Government has carefully considered all of the responses to the consultation on AIM-listed shares being permitted as ISA investments. Whilst noting that the majority of respondents were broadly supportive of the proposed approach, it has taken into account the concerns expressed and has considered the alternative approaches suggested.

On balance, the Government believes that the proposed approach set out in its consultation document is the most appropriate method of implementing the policy. It therefore intends to lay legislation before Parliament this month to extend the range of qualifying ISA investments to include company shares admitted to trading on a recognised stock exchange within the EEA. It is expected that this legislation will take effect shortly after.

The changes being brought forward by the Government will simplify direct ISA investment in small and medium-sized businesses (SMEs). This forms part of the Government’s commitment to help smaller companies succeed by promoting investment to deliver sustainable economic growth.

The Government wants to ensure that businesses, particularly smaller businesses, are able to access finance and support. This change should benefit SMEs with shares quoted on markets that do not currently qualify for ISAs. For example, over one thousand companies listed on the AIM will now be eligible for direct ISA investment.

The changes will provide savers with a tax-efficient way to hold shares traded on SME markets. Until now ISA investors have only been allowed to directly invest in shares listed on recognised stock exchanges. Widening the range of eligible shares will improve consumer choice for ISA investors.

The change means that an individual saver could invest up to £11,520 in the current tax year directly into SME equity markets within their ISA and any gains arising from the growth of the investment would be tax free.

At the end of 2011/12 the market value of adult ISA holdings stood at £391 billion, over £190 billion of which was in stocks and shares ISAs. The tax relief that the Government provides on saving in ISAs was worth an estimated £1.75 billion in 2011/12, and this figure is rising over time.

Economic Secretary to the Treasury, Sajid Javid, said:

“The Government is determined that small businesses are given every opportunity to fulfil their potential. We want the UK to be the best place to start and grow a business. Central to achieving that is access to finance.

We are fulfilling our commitment. Today’s changes to ISA rules will allow SMEs to access another source of funding and follows the Budget announcement to abolish stamp duty on shares traded on growth equity markets. Together these changes will make investing in SMEs more attractive and boost growth.”

Inheritance tax efficiency (through the inability to assign an ISA, including, therefore, the inability to assign into trust) is often mentioned in relation to the tax merit of older wealthier investors holding substantial investments through ISAs. This prohibition (on assignment) continues but for those prepared to accept the higher risk of investing in AIM-listed shares which qualify for IHT business property relief (and not all will, for example, AIM-listed companies involved in investment business or property development will not generally qualify for business property relief) this latest development offers some way out once qualifying shares have been held for at least two years.

Advice will, however, be absolutely essential in determining the most suitable IHT planning strategy taking account of all the solutions available and the tax and investment consequences of “competing” strategies.

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