The ever popular ISA (Individual Savings Account), received a boost yesterday as the government announced shares in smaller companies, quoted on markets such as AIM (Alternative Investment Market), will be eligible to be held in the tax-efficient wrapper from October onwards.
Until now, only shares quoted on recognised stock exchanges have been eligible to be held in an ISA. However, the changes will significantly benefit investors into smaller companies, as well as people with a potential Inheritance Tax (IHT) liability.
Whilst shares held in smaller companies are often exempt from IHT on death of the owner, due to the Business Property Relief (BPR) exemption, any profits are subject to Capital Gains Tax (CGT) whilst Income Tax is payable on dividends received.
Until now, whilst any profits resulting from the sale of shares held in an ISA are tax-free, but this excluded shares in smaller companies, including those quoted on AIM, which are not currently allowed to be held in an ISA.
However, following today’s announcement, it appears investors in smaller company shares will get the best of both worlds. From October such shares will be eligible to be held in an ISA, but will potentially still be excluded from an investor’s estate when they die.
AIM shares to qualify for ISAs
In a statement the government said up to 1,000 companies quoted on AIM will now be eligible to be held in an ISA.
Economic Secretary to the Treasury, Sajid Javid said: “The government is determined that small businesses are given every opportunity to fulfill their potential. We want the UK to be the best place to start and grow a business. Central to achieving that is access to finance.”
Javid continued: “We are fulfilling our commitment. Today’s changes to ISA rules will allow SMEs to access another source of funding and follows the Budget announcement to abolish stamp duty on shares traded on growth equity markets. Together these changes will make investing in SMEs more attractive and boost growth.” (Source: HM Treasury)
Experts have warned though, that whilst the announcement will make holding smaller company shares more tax-efficient, such investments carry significantly higher risk than investments into larger companies. There are also restrictions on which types of shares qualify for BPR and therefore an IHT exemption, including some of those involved with property and financial services.