Isa changes may not affect your investment decisions
IN LAST week’s Autumn Statement, George Osborne announced that the total amount an individual can invest in a tax-free Individual Savings Account (Isa) will increase to £11,520 per year from April 2013. This change won’t have much of an impact on the public’s interest in Isas, however. The small rise (£240) is in line with previous commitments to adjust the allowance each year for inflation. Nonetheless, Isas still remain a popular investment option.
NEW OPTIONS
More interesting, however, is the announcement that the government would consult on whether to alow investors to hold Alternative Investment Market (Aim) listed companies in Isas. Such a move would likely be welcomed, as it gives investors more flexibility and choice on where to invest, although it would only affect investors who already opt to trade individual stocks and shares. These investors represent a small section of the overall Isa market, as most lack the risk appetite, inclination or expertise to look into trading individual shares. This also explains why most investors with a stocks and shares Isa buy managed funds instead of individual equities.
If you were to hold Aim shares in an Isa, there will “almost certainly be a plan fee”, warns Jason Hollands of Bestinvest. So you need to be convinced that the tax benefits will outweigh any costs. This is especially the case with Aim shares, as many of these businesses are growth companies with low or no dividends.
RISK APPETITE
Investing in Aim-listed shares is a risky business. Ben Smaje of Kennedy Black Wealth Management tends to discourage his clients from looking into these sorts of investments. In his experience, clients investing in individual stocks and shares “have often had their fingers burnt”. Aim-listed shares are penny shares, whereby an investor will put forward a small amount in a handful of companies in the hope that one or two will do very well. They also offer “lower levels of disclosure compared to equities in more major markets”, says Smaje. Although this may discourage investors from holding all of their Isa allowance in smaller company shares, it could be an excellent way to diversify a portfolio.
MAKING IT WORTHWHILE
Investments in Aim shares attract Business Property Relief. This could “mean that Isas become inheritance tax efficient if you switched your Isa holding into Aim listed company shares”, says Sarah Lord of Killik.
If you hold shares within an Isa, any dividends received will not be subject to further taxation (20 per cent is automatically deducted as source on dividends), and any capital gains made won’t be subject to tax.
As Hollands advises, “these are benefits primarily for investors who are either higher rate taxpayers (and could benefit from the dividend treatment), or for those who are already fully using the annual gains allowance, which this year is £10,600”. Therefore, unless you have a very high risk tolerance, investing in Aim shares may only be worth it if you fall into either of these two groups.
Relaxing the rules won’t mean that people will suddenly open their eyes to the Aim market. But looking at the bigger picture, allowing investors to hold Aim-listed companies in Isas would provide smaller businesses in the UK with a new source of investment capital – benefiting the economy – as well as giving investors more flexibility and an increased ability to diversify.