Originally set up by the London Stock Exchange in 1995 as a platform for small growth companies to gain access to capital, down the years, the success of the Alternative Investment Market (AIM) has made a meaningful contribution to job creation and GDP growth in the UK. Successive governments have remained supportive of AIM, offering incentives such as tax reliefs as a means to stimulate investment and to compensate investors for the higher risks associated with investing in smaller companies.
Although known as the ‘junior market’ of the London Stock Exchange, AIM has matured a lot over the years, with the types of businesses choosing to list on AIM also changing considerably. Back in 2006, companies making an initial public offering through AIM had an average market capitalisation of £17 million. Today, this average is nearer £75 million. Well-known brands such as Hotel Chocolat, Joules and Comptoir Libanais have all floated on AIM in recent months, and it will continue to attract very profitable, successful businesses.
Using AIM portfolios for estate planning
The step change for AIM has been the decision to allow AIM shares to be held in Individual Savings Accounts (ISAs). This meant that for the first time, individual investors could access portfolios of AIM-listed shares within the UK’s most popular tax wrapper. But while traditional ISAs offer valuable tax benefits during an investor’s lifetime, the benefits effectively cease on the death of the ISA holder. ISAs are subject to inheritance tax if the beneficiary is anyone other than their spouse. Unfortunately, many ISA holders may not even be aware that when they die, their ISAs are treated as part of their taxable estate.
Thanks to the 2013 rule change, investors can undertake inheritance tax planning within the ISA wrapper by investing in AIM-listed stocks that are expected to qualify for Business Property Relief (BPR). Shares that qualify for BPR fall outside of the scope of inheritance tax as long as the shares have been held for two years and are still held at the time of death. Therefore, offering investors an estate planning solution within a tax-efficient ISA wrapper has proven very popular. Since we launched the Octopus AIM Inheritance Tax ISA in the same year as the rule change, we’ve opened more than 4,000 portfolios on behalf of investors.
We try to keep our investment approach simple. We aim to create good growth portfolios for clients who have an appetite for equity risk. We look to invest in good, solid, predictable businesses where we have a high degree of confidence that they will deliver. We take a long-term approach. We don't trade in and out of AIM companies, but become long-term ‘co-owners’ as they embark on their growth journey. Of the 47 companies we currently hold within our AIM inheritance tax portfolios, we have been investors in more than half for ten years or longer. The average market capitalisation for our portfolio companies is over £400 million. These are businesses that are quite established. Moreover, some of the risks associated with investing in AIM-listed smaller companies may be managed by taking that long-term horizon, which some people naturally do with our inheritance tax planning investment services.
A number of the companies we invest in have been around for over 100 years, and for good reason. They exist because there is a purpose for them, and they do what they do extremely well. There’s a good chance that these companies will be around for another 100 years, and that's the point. In attempting to manage risk within our inheritance tax portfolios, we aim to find good, successful companies that are proven. We don't want to invest in disruptive new technologies that may or may not prove to be successful – we want to be able to understand what the growth is potentially going to look like.
Are AIM-listed companies concerned over Brexit?
Over recent weeks, we've spent a lot of time talking to the companies in which we're invested. ‘Brexit’ has been the main focus of media attention in the UK since the outcome of the European Union referendum was announced in June. However, what you’re reading in the newspapers is not what we're hearing from the businesses themselves.
Recent trading statements from the companies we invest in have confirmed that management teams remain confident about future prospects. Around 50% of the companies in our AIM inheritance tax portfolios earn more than half of their earnings overseas, so the recent weakness in sterling has been a benefit. The more domestically based companies in the portfolio are more defensive in nature – for example, CVS Group (veterinary surgeries), Young & Co Brewery (freehold pubs), Restore (document storage) and Renew Holdings (engineering services). In addition, equity markets have continued to operate effectively despite the increased uncertainty. GB Group and Restore have raised £25 million and £35.2 million, respectively, in recent weeks in order to complete earnings-enhancing acquisitions.
Assessing the risks of AIM
It’s important to be upfront about the risks associated with investing in AIM-listed companies. Capital is placed at risk and investors may lose money. In addition, the shares of companies listed on AIM can be more volatile, which means their value can fall or rise by greater amounts on a day-to-day basis. No matter how well an investment or market might have performed in the past, this is not a guide to its future returns.
There are also specific risks around BPR-qualifying investments. Not every AIM-listed company will qualify for relief, and changes in a company’s trading activities or composition could mean it ceases to qualify for BPR in the future. It’s important to understand that inheritance tax exemption is assessed by HM Revenue & Customs on a case-by-case basis when an investor dies. Until this happens, it cannot be stated for certain that a particular company, or even a portfolio of companies, will qualify for BPR.
The Smaller Companies team at Octopus manages approximately £920 million of assets across several AIM-focused mandates, and it has been managing BPR-qualifying AIM portfolios for more than a decade. During this time, our investment approach has remained constant. We’ve witnessed AIM’s maturation, attracting larger, more established companies looking to list. This means that for us, the pool of potential investments – profitable, established, dividend-paying growth companies – has perhaps doubled compared to five years ago.
We will continue to focus on high-quality growth companies demonstrating characteristics that suit the AIM inheritance tax mandate. Companies with high levels of recurring revenue, companies with a niche or proprietary product or service and companies with a predictable roll-out plan are well suited to delivering consistent earnings and dividend growth over a number of years.
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