The removal of stamp duty from Alternative Investment Market (Aim) stocks from Monday 28 April gives another small boost to the market. Investors previously had to pay stamp duty worth 0.5 per cent of the amount they pay for a share in an Aim company to the tax man each time they purchase a stock.
Aim shares surged after investors were allowed to put them in individual savings accounts (Isas) last August and receive capital gains tax and income tax benefits, in additional to the inheritance tax benefits of holding Aim shares for two years.
Most Aim shares benefit from Business Property Relief (BPR). This means that once the shares have been held by an investor for a minimum of two years they are exempt from inheritance tax. However, there is no definitive list of which Aim stocks qualify for business property relief. This is largely because the qualification status of a company or businesses can change over time.
Aim shares are typically held by investors seeking growth who are well aware that the potential rewards come with a higher level of risk.
However, private investors shouldn't rule out the yield and growth potential offered by Aim shares - 51 of the Aim 100 companies now pay dividends, compared with 41 per cent just a year ago, according to research by Banc De Binary.
Selection of Aim 100 shares yielding more than 2.5 per cent, at least twice covered by earnings
| Company | Dividend yield | Dividend cover | Market capitalisation |
| Juridica Investments | 8.60% | 2.76 | £125.1m |
| Pan African Resources | 5.50% | 2.61 | £274.4m |
| Highland Gold Mining | 4.90% | 12.6 | £198.4m |
| ISG | 3.00% | 2.31 | £116.1m |
| CareTech | 2.90% | 3.92 | £116.7m |
Source: Banc De Binary
This has led a reader to ask about the relationship between dividends and potential inheritance tax (IHT) exemption.
Q. "I have a query regarding the treatment of the occasional dividend from Aim shares after the two-year holding period in order to qualify for inheritance tax exemption.
"If it is paid out of the account, is it regarded as a sort of 'benefit in kind' affecting the IHT exemption of the holding? If kept in the account, it will join any capital monies from a previous sale awaiting the next investment. How would the two-year rule apply to the dividend money?"
A. Sarah Hollowell, head of tax and trustee services at stockbroker Killik & Co, says: "I don't really understand the 'benefit in kind' concept this client refers to. However, as far as dividends within an Aim inheritance portfolio are concerned, they would primarily be assessable to income tax. There is, of course, the possibility that the funds were within an Aim inheritance Isa portfolio, in which case income tax would not be an issue.
"If dividends were reinvested, they would be treated in the same way as new capital being introduced into the portfolio - ie, the two-year clock would start from the date of the reinvestment. After two years, as long as the investment was into a qualifying holding, 100 per cent Business Property Relief would be available (meaning no IHT would be payable)."
