Another government-sanctioned financial minefield is being laid under the feet of individual investors looking for a decent return on their money.
New rules coming into force on 5 August 2013 will make it possible for the first time to hold shares listed on the Alternative Investment Market (AIM) within an ISA.
It has always been possible to wrap shares listed on the main stock market in a tax-exempt individual savings account, but the Treasury has now apparently been persuaded by the financial services industry that allowing private investors to pour money into a lightly regulated junior league stock market will somehow boost the small companies sector and stimulate economic recovery.
It is hard, however, to see how this invitation to gamble on the fortunes of unknown businesses can result in anything but financial loss for those least able to afford it.
It is also the exact opposite of The Whitehall Partnership’s approach to investment planning. We simply refuse to take such risks with our clients’ wealth and concentrate instead on capturing the gains of the equities market as a whole.
I think it is important to stress that while any gains from an ISA do not attract tax, it is not widely known that any assets held within that wrapper form part of their holder’s estate and so are subject to inheritance tax.
A superficial attraction of the new AIM/ISA rules is that some AIM-listed shares are exempt from inheritance tax under the business property relief scheme.
The key word here is “some”. It is important to note that not all AIM shares get such generous treatment, and those that do must be held for at least two years in order to qualify.
Needless to say, the prospect of IHT-free investment planning is the lure that those selling the new AIM ISAs are dangling temptingly in front of the unwary.
They are also tumbling over themselves to advertise the big gains that some (that word again) AIM shares have made in recent years.
What they do not say is that for every AIM success there are many more companies that fail or simply stagnate.
Another disadvantage is that the market for an AIM company’s shares will be small, or illiquid, meaning the bid to offer spread – the difference between the prices at which stockbroker buys and sells shares – will be wide.
That means a share may have to appreciate by as much as five per cent or more if it is to be sold at a profit and its trading costs recouped.
Not many AIM stocks have that potential. In fact, the AIM market has lost about 75 per cent of its value since 2000, thus effectively destroying any appeal it might have for long term investment planning.
In my opinion, this development is another miss-selling scandal in the making and should be left to experienced investors who know the risks involved and who can afford to lose their money.
If you have £11,520 (this year’s limit for a stocks and shares ISA) to invest, make sure you talk it over with a financial adviser before you take the plunge – preferably one qualified in the field of estate planning, such as The Whitehall Partnership.
For a free initial consultation call The Whitehall Partnership on 0845 43 49 250 today.