Expert: Raymond Greaves, Head of Equity Funds, TIME Investments Facilitator: John Lappin, Consultant
Headlines:
- Recent budget changes reducing inheritance tax (IHT) relief for AIM investments from 100% to 50% have significantly impacted their role in estate planning, prompting debates about AIM's viability as a tool for IHT mitigation.
- AIM remains a promising platform for growth-oriented investments, with a focus on high-quality companies offering strong financial metrics and long-term potential.
- The potential inclusion of AIM investments in Self-Invested Personal Pensions (SIPPs) is a key opportunity for growth but requires clarity on regulatory and practical implications.
Discussion points:
Overview of AIM and Its Current State
The Alternative Investment Market (AIM) has been a key platform for smaller or early-stage companies to access public markets since 1995. Over 4,000 companies have been quoted on AIM, raising more than £135 billion in capital. It is considered the most successful small-company stock market globally, offering opportunities for both investors and issuers.
Analysis of Investable AIM Companies
A subset of AIM companies, defined as those with a market capitalization exceeding £100 million and excluding commodity-related or early-stage businesses, were highlighted. Out of 720 AIM-listed companies, approximately 120 meet these criteria. Compared to their main market counterparts, these companies tend to demonstrate higher returns on capital, lower leverage, and faster growth rates.
Impact of Budget Changes on AIM Investments
The recent budget's reduction of inheritance tax (IHT) relief for AIM investments from 100% to 50% has raised concerns among investors and advisers. The reduced tax incentive has led to discussions about whether AIM’s risk-return profile, combined with the lower tax benefit, will continue to be appealing for IHT planning.
Potential Inclusion of AIM Investments in SIPPs
There was discussion on the possibility of including AIM investments in Self-Invested Personal Pensions (SIPPs) as an alternative growth avenue. The SIPP market, valued at over £500 billion, could significantly increase demand for AIM investments. However, there are practical and regulatory challenges that need to be carefully considered before moving forward with this idea.
Challenges and Opportunities for Financial Advisers
Challenges include the high volatility of AIM stocks, difficulties in explaining risks to clients, and administrative burdens associated with AIM investment providers. On the opportunity side, advisers can benefit from providing exposure to providers demonstrating consistent outperformance, improving communication and transparency with intermediaries, and highlighting AIM’s relative undervaluation compared to global peers as a compelling narrative for long-term investors.
Future Outlook for AIM and UK Equities
The UK equity market, including AIM, appears undervalued, offering potential for growth-oriented investors. The need for stable, growth-oriented policies to support smaller companies and enhance AIM’s role in the economy was emphasized.
Key takeaways:
- Focus on Quality: Emphasize high-quality AIM companies with strong growth potential and high free cash flow yields.
- Adapt to IHT Changes: Wait for further clarity on IHT rules before making significant adjustments to portfolios.
- Explore SIPPs Inclusion: Monitor developments regarding the inclusion of AIM investments in SIPPs, while preparing for potential challenges.
- Improve Communications: Enhance reporting and engagement with intermediaries to address administrative hurdles and build confidence in AIM investments.
- Develop Client Education: Create strategies for explaining the risks and benefits of AIM investments, particularly in light of the reduced IHT relief.
- Monitor Macro Developments: Keep a close eye on economic and political factors, such as Brexit and growth-oriented policies, that may affect AIM and the UK equity market.
