AIM shares and tax – Budget 2007 announcements

There was an announcement in the 2007 Budget that appeared to have implications for the tax position of AIM shares. In fact, the announcement did not affect the status of AIM shares, though there may in future be some changes affecting overseas exchanges, and in any event this is a complex area requiring care and specific advice.

The special tax treatment for AIM shares arises from rules that actually refer to companies whose shares are not “listed on a Recognised Stock Exchange”. As long as a company’s shares are not listed on a Recognised Stock Exchange, the shares have the following tax advantages:

• Capital gains business asset taper relief

Gains on sales of shares in unlisted trading companies will qualify for business asset taper relief. This means that the rate of tax for a higher rate taxpayer will be no more than 10% after the shares have been held for two years or more.

• Inheritance tax business property relief

Shares in unlisted trading companies qualify for business property relief, giving a 100% exemption from inheritance tax after you have owned the shares for at least two years.

• Enterprise Investment Scheme

If you subscribe for new shares issued by an unlisted trading company, you may be entitled to relief under the Enterprise Investment Scheme. This may give you an income tax refund of up to 20% of the amount you invest, plus complete exemption from capital gains tax on any gains on sale. You may also be able to roll over other capital gains into your share subscription, though these gains will become taxable when you sell the shares.

In relation to AIM shares, relief under the Enterprise Investment Scheme has been severely curtailed by the 2007 Budget. The EIS relief will now be restricted to companies with fewer than 50 full-time employees, and there will be a limit of £2 million on the amount of money a company can raise under EIS and other venture capital schemes in any 12-month period. Companies have until the date the Finance Act gets Royal Assent (normally in July) to issue shares without these restrictions.

Shares in unlisted companies can not, however, be included in PEPs or ISAs.

Note that the tax rules above apply to companies with no shares listed on any Recognised Stock Exchange. The main market of the London Stock Exchange remains the only UK Recognised Stock Exchange, but there are several of these overseas. It is not uncommon for companies with shares on AIM to have a secondary listing overseas, and that may be enough to make the company “listed” for UK tax purposes.

You should take specialist investment advice before investing in AIM shares, and make sure you establish the tax position before you make any assumptions about how they will be treated for tax.