The Alternative Investment Market, or AIM as it is more commonly known, is the London Stock Exchange’s (LSE’s) international market for smaller growing companies. It is here that investors can stumble upon a wide range of businesses, from young, venture capital-backed start-ups to well-established companies looking to expand.

AIM was launched in 1995 with the objective of offering smaller companies – from any country and industry sector – the opportunity to raise capital on a public market. Since then, more than 2,500 have joined, raising over £34 billion through initial public offerings (IPOs) and further capital raisings. According to figures from the LSE, the companies quoted on AIM come from 26 countries and range across 30 market sectors and 90 sub-sectors.

Expanding its reach

AIM published two indices – the FTSE AIM UK50 and the FTSE AIM100 – but these were expanded in May 2006 with the launch of the FTSE AIM All-Share Supersector indices to expand the choice for AIM investors, providing 18 new sector indices to identify macroeconomic opportunities for investment. They were also a reflection of the way in which AIM has developed and expanded over the previous decade.

Most AIM-listed companies raise money through issuing shares via a ‘placing’ when they float. Simply put, the company approaches a selection of financial institutions that agree to invest money in return for shares. One of the attractions for smaller growth companies is that listing on AIM is neither so onerous nor so expensive as seeking a full listing on the main London Stock Exchange. However, there is still a significant degree of regulation.

Nominated advisers (nomads) are central to the regulation of AIM-listed companies. They act as the principal quality control mechanism and carry out checks on companies before agreeing to sign a declaration that the particular company is appropriate and ready to come to AIM.

Aiming for less tax

For the private investor, a key attraction of investing in AIM companies is the tax breaks that they offer. Under current legislation, shares in AIM-listed companies that meet certain conditions qualify for business asset taper relief (BATR). Effectively, this can reduce the rate of tax on capital gains to ten per cent for higher-rate taxpayers and five per cent for basic-rate taxpayers, on shares that have been held for a minimum of two years.

John Davey, a research analyst at Bestinvest, explains, ‘Taper relief reduces the gains made on sales of shares or securities, according to the length of the period of ownership and is applicable to individuals and trustees, whether they are resident in the UK or not.’

But in his first Pre-Budget Report, Chancellor of the Exchequer Alistair Darling outlined plans to abolish taper relief and replace it with a flat rate capital gains tax (CGT) of 18 per cent.

Davey points out, ‘The proposed changes to the CGT rules will reduce the maximum tax saving possible for a higher rate-taxpayer to 22 per cent. A basic-rate taxpayer could previously have secured a tax saving of up to 12 per cent. Under the proposals, the maximum potential benefit from BATR for a basic-rate taxpayer will generate a tax saving of just four per cent.’

Easing your inheritance

Growing numbers of private investors are using AIM as a way of avoiding inheritance tax (IHT), since qualifying AIM companies also attract business property relief (BPR), which gives exemption from IHT if the shares are held for a minimum of two years.
IHT rules state that anyone transferring assets to children, in what is known as a potentially exempt transfer (PET), must survive for seven years for the gift to be fully exempt from IHT. By investing in AIM-shares, however, this process becomes much quicker.

Robin O’Grady, head of sales and marketing at Williams de Broë Investment Managers, explains that ‘Investment in certain AIM shares can enable individuals to benefit from 100 per cent IHT relief after a period of only two years via BPR. By using investments that qualify for BPR, investors retain control of their assets, do not need to establish complicated trusts and do not require medical underwriting.’

There is, however, a downside – your capital is not guaranteed, and because AIM is dominated by smaller start-up companies with more volatile shares, investing in this market is very high risk.

Nick Williams, chartered tax adviser for Clerical Medical, says, ‘It is a far quicker way to reduce IHT than passing assets down to children, as the investor has to live for a further seven years. However, in the current climate, more people are falling into the IHT net, not just the super millionaires, and for those who want to put away their life savings, a high-risk plan such as AIM may not be suitable.’

Not all AIM-listed companies qualify for IHT exemption. The definition of ‘qualifying’ relates to trading companies and excludes firms in financial services and investment, and overseas mining and exploration companies.

‘There are a few “buyer beware” tax issues to consider,’ explains Sheena Hay, tax manager at Grant Thornton. ‘The AIM company must be trading and cannot be involved
in dealing in stocks and shares (except market-makers on the stock exchange and discount houses), dealing in land and buildings or holding investments, which includes letting land.’

Ready, aim, fire

For those new to AIM investing, the main thing to keep in mind is that there is no such thing as a defensive AIM share. AIM is traditionally dominated by oil and mining stocks and, while oil shares in the FTSE 100 are seen as defensive, AIM-listed companies operate in more niche areas of particular sectors and are subject to greater volatility. One of the main reasons for volatility is the lack of liquidity – the ability to deal freely – in particular shares.

Graham Neale, head of equities at Killik & Co, says, ‘While the second half of 2007 was a difficult period on AIM, this needs to be put into perspective. AIM shares have always been volatile, but AIM remains a solid platform for the long-term delivery of positive capital returns combined with relief from IHT. In fact, we believe the market sell-off has created a range of oversold opportunities.’

Selecting stock on AIM is very different to the process you may go through when investing in companies in, say, the FTSE 100. AIM investors must research individual companies rather than just following sectors, looking specifically at how frequently their shares are traded on the market and what the company directors’ salaries are. Diversity is key to any AIM portfolio and, because of the large number of sectors that are represented on AIM, there is no need to focus all your attention in one place.

Getting a helping hand
If you are new to investing and do not have a stockbroker, the LSE lists them on its website www.londonstockexchange.com.

Before you take investment advice from anyone or hand over any money you should check the person you are dealing with is authorised to conduct investment business. All firms who conduct investment business and who deal with the public – whether they
are banks, building societies, stockbrokers or independent advisers – must be authorised by the UK’s regulator, the Financial Services Authority (FSA), or be recognised by the FSA as a recognised professional body (RPB) or recognised investment exchange (RIE).

Once you have reached a decision about the company and sector you want to buy shares in, your stockbroker will approach a market-maker – who will quote competing prices for buying and selling shares – to ensure that you are able to buy at the best price at the time of trade. Stockbrokers charge commission for carrying out each transaction on your behalf, a rate that varies from firm to firm.

With the proposed tax changes due to come into effect in April 2008, investors should watch out for robust shares that are able to withstand forced selling. As Donald Robertson, fund manager of the SVM UK Emerging Fund points out, ‘If we are heading for a recession, investors should focus more on sectors that are fairly immune, such as beverages, tobacco and food products, rather than those sensitive to the economy. We expect the increases in share prices and volatility in the run-up to the proposed tax changes to be relatively short term.’