This weekend marks ten years since AIM shares could be bought and held within ISAs. On the tenth anniversary of the change, what has this meant for investors and for the AIM market?
Allowing AIM shares in ISAs back in 2013 was a key step in the government’s desire to stimulate investment in UK SMEs. The Chancellor at the time, George Osborne, hoped to unlock the £190 billion in Stocks and Shares ISAs and to channel more of that investment into smaller British companies. The amount held now in Stocks and Shares ISAs is around £460 billion1, but has the overwhelming popularity of investing through ISAs driven investment into UK plc as intended?
£51.6 billion of new money has been raised by companies through the AIM market over the past ten years (source: London Stock Exchange). However this represented a reduction in the amount raised on AIM in the preceding ten years from 2003 to 2013.
A conclusion could be drawn that permitting AIM shares to be held within ISAs has not had the desired effect of stimulating investment in the UK. We disagree and believe that there are other factors that have inhibited the development of the UK markets, including the FTSE All-Share and AIM. Global institutional investors have significantly reduced allocations to the UK, seeing us as too small and observing that the UK’s largest listed businesses lack the structural growth that has underpinned much stronger returns in overseas markets. The sale of larger British-listed investments by these institutions has had a trickle-down effect on the valuations of the UK’s smaller listed businesses, restricting their ability to raise capital and grow. The effect of this would have been far worse for AIM-listed businesses had the policy on holding AIM shares in ISAs not been introduced.
Against this negative backdrop, where does this leave the AIM market over the next ten years? The significant change in recent weeks has been the Mansion House Reforms, of which an objective is ‘to incentivise companies to start and grow in the UK by strengthening the UK’s position as a listings destination’. Already pension funds worth over £400 billion have committed to invest at least 5% of their investment plan in unlisted companies, startups and private equity by 2030. AIM shares fall within the scope of this commitment, whereas the Main Market does not. Currently the largest pension funds have minimal direct investments in AIM companies, other than through third-party funds. It may be reasonable to expect, given the reforms, that over the next few years additional money will be allocated to these funds, which will allow for further investment into the AIM market and be supportive of valuations of the companies listed on AIM.
Allied to the positive impact of these reforms is the increasingly pressing need for advisers to consider means of reducing inheritance tax for those clients with estates exceeding the nil-rate band, and the large role that ISAs will play in the taxable estate of those clients upon death. Over half of the assets held in ISAs are owned by people aged over 65. ISAs have provided an excellent tax-wrapper for investment, free from CGT and tax on dividends respectively. Nevertheless, investments within ISAs fall inside estates for IHT purposes, and investments in Business Relief-qualifying AIM shares will continue to be, subject to changes in taxation rules, the most widely used method for those clients wanting to maintain the tax benefits of their ISA wrapper whilst also potentially mitigating inheritance tax.