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Now business asset taper relief has been removed, what are the remaining tax incentives for investors in AIM? Joss Alcraft, a principal at law firm Matthew Arnold & Baldwin, explains.

AIM has still not fully recovered from the withdrawal of business asset taper relief, which allowed shareholders in AIM-quoted companies to pay a lower effective rate of capital gains tax (CGT).

Prior to 6 April 2008, private AIM investors who paid income tax at 40 per cent were able to benefit from an effective CGT rate of 20 per cent after one year of their AIM shares being held, reducing to 10 per cent after two years.

This is no longer available (except in one particular circumstance: see below) – removing a key benefit of investing in AIM and contributing to the dramatic drop in the value of the AIM All-Share index in 2008, when share prices nosedived by two-thirds.

Nevertheless, there are still important tax reliefs available for AIM investors, outlined here.

Entrepreneur’s relief
Gains on the sale of shares in AIM-traded companies are now taxed at 18 per cent, the same rate as would be applicable to FTSE 100 companies. However, an effective CGT rate of 10 per cent is possible under so-called ‘entrepreneur’s relief’ – the catch is that you must have held at least five per cent of the company’s shares for one year in order to qualify.

Income tax relief
AIM-traded companies are not regarded as being “listed” for tax purposes. This confusing rule does have the advantage of allowing them to be eligible for the Enterprise Investment Scheme (EIS), provided that other criteria are met. These include having less than £7 million of assets before investment (and less than £8 million afterwards) and carrying on a qualifying trade – financial services and property development are on the blacklist, but for a full list of excluded activities, see the HMRC website.

Under EIS rules, private AIM investors may claim relief against income tax up to a yearly total of £500,000 on new ordinary shares. Broadly speaking, providing that the shares are held for a period of at least three years, EIS income tax relief will be available at the rate of 20 per cent (in other words, the income tax liability of any investor is reduced by 20% of the sums invested, meaning there is a maximum benefit of £100,000). Any investor who qualifies for such relief is also entitled to exemption from CGT on any disposal.

Inheritance tax exemption
The death of a shareholder or the death of a donor, if shares were given away within seven years of the date of death, brings about what’s known as a “chargeable transfer” and inheritance tax may apply. However, if an AIM-traded company is qualifying and shares have been held for at least two years before the chargeable transfer, then full relief from inheritance tax is available.

Loss relief
If an individual subscribes for shares to which EIS relief is attributable in a qualifying trading company and makes a loss for CGT purposes, then he or she can claim relief against taxable income, subject to certain conditions being met.

CGT deferral
Another benefit for investors in EIS-eligible shares is the ability to defer the payment of CGT on a gain on any asset. The investment in EIS-eligible shares must be made in a period beginning one year before and three years after the investor has realised a chargeable gain. There is no minimum period for which the shares in question must be held.

ISAs
Ironically, the very fact that allows investors in AIM-traded companies to benefit from the tax reliefs above, denies them another major tax advantage. As AIM is not a recognised stock exchange, shares in AIM-traded companies cannot be put into an ISA unless the company in question is dual-listed – that is, also listed on a recognised stock exchange. Whether this situation will change is not known, but clearly allowing shares in AIM traded companies to be put into ISAs would provide a major fillip to this market in somewhat troubled times.

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As to whether the next government will reverse the recent CGT changes or otherwise assist in making AIM-traded shares more attractive to investors from a taxation point of view, it is looking increasingly unlikely. They will have budgets to balance. Some commentators have even suggested that the recent rise in the top rate of income tax to 50 per cent may tend more towards an increase in the rate of CGT: or possibly a two-tiered structure.

Though it would be unwise to bank on extra tax breaks for AIM shareholders, the combination of the incentives currently available and the additional liquidity compared to investments in unlisted companies makes them worth considering for investors looking to reduce their tax burden while supporting potentially high-growth enterprises.