AIM shares tax relief often off target

published 7 September 2007

It's not just cheap and light corporate regulation that has boosted the Aim market's popularity. Private investors have flocked to London's junior market because it offers "some of the last available" tax reliefs, says the Investors Chronicle. Two of these tax breaks apply to some Aim shares. After a two-year holding period, they receive full exemption from inheritance tax, potentially saving investors' heirs a 40% tax charge. Moreover, they offer a reduction in capital gains tax of 75% if the shares have been held for at least two years and by 50% if held for between one and two years, says Maurice Fitzpatrick of Grant Thornton on FT.com.

But investors beware: ferretting out the Aim shares eligible for tax relief is hardly an exact science. The key is whether a stock is also listed on a recognised stock exchange overseas (irrespective of whether or not it is based in a foreign country). The recognised markets encompass major bourses in both the developed and developing world, as well as some obscure ones such as Malta. An Aim share with a dual listing on a recognised stock exchange does not qualify for tax relief. There is a list of these exchanges on the website of Revenue and Customs, although HMRC advises examining the official list of the foreign exchange or asking the company or exchange itself for confirmation. In addition to not being dual-listed, a company must also be deemed to be a trading company by HMRC. Activities that fall outside this definition include dealing in shares, land or property, and making investments. So there are plenty of grey areas; neither Aim nor institutional investors specialising in the junior market have yet produced a definitive list of qualifying shares.

There is some good news. Stocks that qualify can be traded for other eligible ones (after two years) without the tax relief clock restarting. And stocks that are dual-listed and so do not qualify are sometimes eligible to be held in Isas or Peps (which Aim shares usually aren't), says Robert Budden in the FT. But overall, the complexity of the situation means investors considering an Aim share should consult their stockbroker about its tax status before buying.