Should Alternative Investment Market (AIM) shares be eligible investments for Individual savings accounts (Isas)? That was the most interesting question raised during the Autumn Statement last week. Osborne revealed news that the government is going to hold a consultation on this issue.
Why it needs to hold a consultation other than to give a few civil servants something to do, I have no idea. The subject has been kicked around for years. The arguments have already been well rehearsed. Why somebody in the government cannot just make a decision, I do not understand.
However, when it comes to tax and savings, even the simplest things become complicated over time and the government has managed to get itself in a right old muddle over the AIM. Let me first deal with the good news.
From next April, we will all be allowed to put an extra £240 into our Isas, making a total of £11,520 that can be sheltered from the tax man. Successive governments have regularly raised the Isa allowance presumably to encourage us all to save, and we can only hope that they do not think better of such generosity.
Three reasons AIM shares have been overlooked
But the issue at hand is whether AIM shares should qualify for Isas. In the past there have been two official reasons why not, to which I will add a third.
The first official reason is that AIM shares used to already benefit from favourable tax treatment in the form of taper relief. So we could hardly expect them to benefit from the Isa shelter also. But taper relief on AIM shares no longer exists, although perversely, AIM shares do still attract relief from inheritance tax. So if you have held AIM shares for two years, they are outside the scope of inheritance tax, effectively being treated as if they were ‘unquoted’ shares.
The second official reason why AIM shares have been banned from Isas is they are considered too risky. We are supposed to put money aside into our Isas so that we do not have to rely upon state aid in our old age, a purpose that would be defied if we lost the lot on risky investments. This is where I really get on my hobby horse.
The Financial Services Authority (FSA) has decreed that small companies are high risk and so, for example, prevents fund managers from investing in small companies for widows and orphans whose stated investment target is ‘preservation of capital’. However, while it may be true that small companies are more likely to be riskier than big companies, this is not a function of their size.
A much better way of distinguishing between high-risk and low-risk shares would be rudimentary profit and loss and balance sheet analysis. Businesses do not get into trouble because they are small, but because they have debts that they cannot repay – as all those conservative investors who bought bank shares have discovered.
The third issue concerns the government’s belief that the money of UK savers should help finance British industry. It likes the idea that the interests of UK savers could be aligned with those of the UK economy and believes that the cash of AIM investors could usefully stoke the small company sector.
The problem here is that the London stock market has gone out of its way to promote AIM as an international market for small companies. All manner of overseas companies, including many that have decidedly dodgy practices of accounting and corporate governance, now have their shares quoted on AIM. Investment into these would certainly not do anything for the cause of the UK economy and may well not do much for the cause of UK savers either.
Time to sort this mess out
But, of course, in this respect AIM is little different from the main market. The ranks of ‘blue chips’ are now full of foreign companies, Russian oligarchs and other shady characters. While AIM may be considered a high-risk market that is liable to channel UK private savings into overseas companies and economies, the very same can be said for companies quoted on the London Stock Exchange’s Main List.
The government needs to sort out the mess and a good place to start would be a determination of the real purpose of Isas. I’d say that the principal purpose of Isas is to deliver a good long-term return for UK savers. If this is so, then all the evidence shows that returns from some small companies beat those from large companies over the long term.
So why not cut out all the consultation and just get on with it? Make AIM shares eligible for Isas, please. A recent e-petition for the government to open up options for private investors sent to the HMRC collected nearly 3,000 signatures. Sadly this e-petition is now closed, but it is clearly a topic people have a lot to say on and I’d be very interested to hear your views on this matter. Please leave your comments below.
• This article is taken from Tom Bulford’s free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.
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