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The Tax Benefits of AIM

Companies traded on AIM are given favorable tax treatment by the Government and are regarded by the Inland Revenue as unquoted for this purpose. The tax relief’s available include:

Capital Gains Tax
CGT business asset taper relief
Taper relief was introduced in 1998 and applies to individual investors and trustees (it does not apply to corporate investors). The relief reduces a chargeable gain assessable to CGT in relation to the period the investment is held, and the scales of relief depend upon whether the investment is a ‘business’ or ‘non-business’ asset. The relief’s can reduce the tax on disposal after two years to only 10% of the gain.

Shares in qualifying, trading AIM companies are classed as ‘business’ assets, which attract significantly higher rates of taper relief – these can reduce the effective rate of tax to 10 per cent for a higher rate taxpayer after a holding period of two years.

Taper relief reduces the gains made on sales of shares or securities, according to the length of the period of ownership. Unlike other relief’s such as EIS, it does not matter if they are subscribed for in new issues or purchased in the market. Taper relief is applicable to individuals and trustees, whether resident in the UK or not, on gains assessed to UK CGT.


Gift Relief
There is no general CGT relief for gifts (although transfers between husband and wife are on a no gain no loss basis). However, if shares or securities in an AIM trading company are transferred, other than at arm’s length, the deemed capital gain arising can be ‘held over’, ie the CGT liability is postponed until a subsequent arm’s length disposal by the transferee, who effectively inherits the transferor’s base cost.

The relief must be claimed by both the transferor and transferee within five years and ten months of the end of the relevant tax year.

Who can benefit from CGT gift relief?

• The relief is particularly useful for the transfer or gift of shares within families.
• The transferee must be resident or ordinarily resident in the UK and remain so for six years.
• There are no specific requirements for the transferor.
• There is no minimum or maximum holding required.
• It does not apply to a gift of shares to a company.

The Enterprise Investment Scheme (EIS)
The Enterprise Investment Scheme (EIS) can benefit individual investors who subscribe for new ordinary shares in AIM companies which qualify as trading companies. Most individual investors, subject to their personal circumstances, should be eligible. Qualifying investments up to £400,000 in aggregate in a tax year (husband and wife may each invest £400,000) entitle an investor to the following tax reliefs:

20 per cent initial income tax relief on investment (‘initial relief’)

• The investment must remain qualifying and be held for three years to qualify for this relief.
• For shares subscribed prior to 6 October in any tax year, a maximum of 50 per cent of each investment and no more than £50,000 in aggregate may be treated as invested in the previous tax year.
• Relief is restricted to the actual income tax liability for the year, if lower than 20 per cent.

Tax deferral
In addition, or as an alternative to claiming the initial relief, investors may defer assessment to capital gains tax on other gains by reinvesting those gains in subscriptions for new ordinary shares in qualifying companies.

Accordingly, an investor may also possibly benefit not only from the 20 per cent initial tax relief and the other reliefs as above (for investments up to £400,000), but also by deferral of assessment to capital gains tax (40 per cent for a higher rate taxpayer) on the gain which is reinvested. Accordingly, it is possible for investors to claim initial tax relief of 60 per cent (for a higher rate taxpayer) on the first £400,000 (re)invested.


‘Serial’ investors
Where the asset giving rise to the gain was itself a qualifying EIS investment and made on or after 6 April 1998 and the gain on disposal of that asset is reinvested into a second EIS investment then the period of the taper relief is extended for the entire periods of ownership of the original and new shares (up to the maximum allowed) but ignoring any periods between the disposal of the original shares and the acquisition of the new shares where no asset is owned. This potential maximisation of taper relief encourages serial reinvestment into qualifying companies.


Exemption from capital gains tax on disposal

• The investment must be held for three years
• Initial relief must not be withdrawn
• The exemption is restricted if initial relief Was not given on the full amount or if that amount has been reduced

Loss relief if the investment fails or is disposed of at a loss

• This is calculated at an investor’s top rate of tax (40 per cent for a higher rate payer) effectively on the net loss, after taking into account the initial tax relief.
  
• Losses can be relieved either against capital gains in the year of loss or a subsequent year or against income in the year of the loss or the previous year.
  

Inheritance Tax (IHT)
Business Property Relief
Investments in qualifying AIM trading companies can attract 100 per cent relief from IHT provided that the investment is held for at least two years before a chargeable transfer for IHT purposes. For this purpose the ‘trading company test’ is one of wholly or mainly (over 50 per cent) rather than the more restrictive definition for taper relief, requiring an 80% trading test.

Who can benefit from IHT Relief ?

Estates and beneficiaries of UK domiciled individuals who are likely to be assessed for IHT on a chargeable transfer which include:

• The death of a shareholder
  
• Death of the donor, if the shares were gifted within seven years of death
  
• Chargeable lifetime transfer (eg into a discretionary trust)
  
  

Loss Relief
Should an investment in shares be disposed of at less than cost, it may be possible to relieve the loss arising against capital gains of that or a subsequent year. Where the investment is in new shares subscribed for (ie not purchased) in a trading company which satisfies the EIS conditions, the loss arising may instead be relieved against income of that year or the previous year. If there is any loss remaining after claiming relief against income, such loss is available for relief against capital gains either of the current or subsequent years.

Who can benefit from relief for losses?

• Individuals or trustees who are resident or ordinarily resident in the UK.
  
• Separate rules apply for companies.
  
• The loss must arise as a result of a sale at arm’s length, a liquidation or where the investor is able to claim that the investment has become of negligible value.
  
  

Venture Capital Trusts (VCTs)
A VCT is a fully listed company, similar to a quoted investment trust, which is approved by the Inland Revenue and whose investments must, after three years, be at least 70 per cent in qualifying unquoted trading companies. In this way, investors in VCTs can gain access indirectly to a professionally-managed portfolio of unquoted investments – which, for this purpose, can include shares in qualifying AIM companies.

Investments in VCTs (whether purchased in the market or subscribed for) of up to £200,000 in a tax year entitle individual investors to the following tax reliefs:

• exemption from tax on dividends
• exemption from capital gains tax on disposal of shares in the VCT.
  
  

In addition, for subscriptions of up to £200,000 per annum in new ordinary shares issued by a VCT can qualify for a 40 per cent initial income tax relief on the amount invested, provided the shares are held for three years.

Note: the initial income tax relief of 20 per cent applied in relation to shares issued by VCTs in the tax years 2004/05 and 2005/06 only.


Who can benefit from a VCT investment?
Most individual investors, subject to their personal circumstances, should be eligible – there is a maximum limit of £200,000 per annum which can be invested by each of a husband and wife. For Initial relief an investor need not be UK resident but must be a UK taxpayer and must hold the investment for three years.


Corporate Venturing Scheme (CVS)
The CVS is a tax incentive scheme which has been introduced to encourage companies (‘investing companies’) to invest in small higher risk trading companies (‘issuing companies’) to form wider corporate venturing relationships. The scheme has been described as the equivalent of the EIS for companies because of the similarities in the issuing companies that qualify and the reliefs available to investing companies. The CVS entitles investing companies to the following tax reliefs:

20 per cent corporation tax relief on investment

• Investment must be in new ordinary shares in qualifying companies.
• Investment must be held for at least three years
• There is no limit on the amount that can be invested subject to:
  • the gross assets of the issuing company not exceeding £15 million before investment and £16 million immediately after, or
  • 30 per cent control by the investing company.
  • The issuing company must not have raised more than £2m from EIS, VCT or CVS investors in the last 12 months before the relevant investment
• Relief is limited to the tax liability of the investing company in the tax year of investment if this is less than 20 per cent of the investment.

Deferral of tax on CVS gains

• A gain arising on the disposal of shares invested under the CVS may be deferred if it, or part of it, is reinvested into another investment under the CVS.
  
• There is no limit to the amount that can be reinvested subject to the gross assets and control tests.
  
• Reinvestment must be made in a different company to that in respect of which the gain arose.
  
• Reinvestment must be made in the period from one year before to three years after the date when the original gain arose.
  

Relief against income for capital losses

• The loss is set against taxable income of the year in which the loss arises and, if unrelieved and a claim is made, against income of the previous 12 months
  
• A claim to carry back the loss must be made within two years of the end of the period in which the loss arises.
  
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