By Miguel Fraga
Launched in 1995, the Alternative Investment Market (AIM) is a sub-market of the London Stock Exchange which allows young fledgling companies to float their shares with a more flexible regulatory system than that applied to the main market. Since inception, the AIM market has grown substantially from just 10 to now 765 listed companies with a combined total market capitalisation of over £89bn, diversified across 40 different sectors and operating in more than 100 countries. Many of these companies operate in exciting and dynamic high-growth industries including those providing renewable energy solutions such as hydrogen power, software services to a myriad of end-markets, pioneering medical equipment manufacturers, business communication facilitators and smart metering services.
And with the market down 35% YTD and 37% from its recent peak, now may be a very good time to invest. Valuations are now approximately 50% cheaper compared to peak with prospective P/E and EV/EBITDA multiples at 18.2x and 12.5x respectively, well below long-term median levels of 23.9x and 19.6x, respectively. In addition, investments in the AIM market offer a powerful benefit in helping clients seek shelter from the impact of inheritance tax (IHT).
Inheritance Tax is a tax imposed on the estate of someone who has died including all property, possessions, and money when this is passed on to successors. The standard IHT tax rate in the UK is 40% and is usually charged on the part of the estate that’s above the tax-free threshold (nil rate band) which is currently £325,000. Many of the listed shares in the AIM market qualify for Business Property Relief (BPR), which if held for a minimum of 2 years, may provide up to 100% exemption from inheritance tax on transfers of value at death. To put this into perspective, the inheritance tax saving of 40% expected from an AIM portfolio that has been invested for at least two years would more than offset the steep market decline of 37% from peak witnessed to date.
The general rule for a company to qualify for Business Property Relief is that it must be running a business that benefits the economy rather than simply making money on investments. However, the ultimate assessment is made by HMRC at the time of death, and therefore there cannot be any guarantee that an AIM company that qualifies for BPR today will remain BPR-qualifying in future.
At Hottinger, we offer the AIM Portfolio Service. This is a discretionary managed investment service presented to clients, particularly those seeking to mitigate their IHT liability, which invests in a diverse portfolio of 25-35 AIM-listed companies that may qualify for BPR and thus, IHT exemption at the time of purchase. There is no definitive list of BPR qualifying shares issued by HMRC so the exemption is established at the time of death subject to the rules and regulations governing IHT at that point. We conduct extensive due diligence and in-depth research on target companies, identifying those having compelling and sustainable business models which we believe offer strong growth potential over the long-term.
Recent additions to our AIM portfolios have included Advanced Medical Solutions Group, a world-leading developer and manufacturer of advanced surgical and wound care products, as well as CVS Group, one of the largest vertically integrated veterinary services providers in the UK. Both companies maintain strong market share in sectors witnessing good secular growth, coupled with quality management, strong profitability and cashflow visibility as well as robust balance sheets to withstand even the harshest of expected recessionary headwinds.
While the benefits of AIM-listed investments are attractive, it should also be noted that shares in AIM companies generally carry higher risk than those of the main market, with less stringent regulations both for admission and reporting. The requirement that companies should have three years of trading history does not apply to AIM, shareholder approval is only needed for the largest transactions, and financial disclosure and reporting requirements are also less demanding. In addition, shares in AIM-listed companies may exhibit higher volatility and lower liquidity than other shares listed on the London Stock Exchange. This means that if you look to sell shares, you may not be able to sell them immediately and you may have to accept a price that is less than the real value of the companies. We would, therefore, recommend that investors considering an investment as part of their estate planning discuss its appropriateness with their advisers.
For further information on the Hottinger AIM Portfolio Service: https://hottingergroup.wpengine.com/services/investment-management/
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