The Treasury has announced that shares in companies listed on the Alternative Investment Market (Aim) will be permitted in individual savings accounts (Isas) by autumn 2013.
The government plans to introduce the necessary legislation in July 2013 and it is expected that this will take effect shortly after. The government intends to apply the same extension to child trust funds and Junior Isas.
The government's conclusion to its consultation process makes clear that tax relief relating to certain Aim shares, including Inheritance Tax Business Property Relief, will remain in place within an Isa wrapper. This paves the way for inheritance tax (IHT)-free Isas to be set up - investments held in Isas are currently free from capital gains tax and income tax.
The development was met with mixed views from brokers and financial advisers.
Gavin Oldham, chief executive of The Share Centre, said: "We welcome the Treasury's decision wholeheartedly. The inclusion of Aim-listed shares into Isa portfolios marks a watershed moment for both investors and the UK's small, but growing, companies. With stamp duty on Aim-listed shares to be abolished from 2014, investors face a much broader selection for tax-efficient investments. Now, funding will no longer be diverted away from the small-cap sector because of the lack of a tax wrapper in comparison to other listed stocks. This is only good news for small- and medium-sized enterprises looking to raise the finance they need to drive a bottom-up recovery in the UK economy."
Others are concerned that investors could end up taking more risk than they realise. Patrick Connolly, certified financial planner with Chase de Vere, said: "The risks of investing in shares are multiplied when investing in small companies, particularly those where reporting requirements are not as stringent, such as shares listed on Aim. There is the potential to make big gains, but also the risk that you could suffer major losses."
He points out that the FTSE Aim All-Share Index stood at 2,925 on 3 January 2000; today it is at only 694, a fall of 76 per cent over 13 years. In only six months from 8 June 2008 to 8 December 2008, the Index fell by a staggering 62 per cent.
Mr Connolly added: "There is a real danger that investors could be enticed by impressive short-term performance figures after we have periods when Aim shares have performed well, which at some points they undoubtedly will, or even by the prospect of an IHT-free Isa which, in reality, could only give genuine benefit to a very small number of people.
"Most investors should have little if any exposure to Aim shares in their portfolios and, with the investment risks probably outweighing the tax benefits, should dismiss the prospect of an IHT-free Isa as little more than a gimmick."
The alternative to investing directly in Aim-listed companies is to go for a fund which invests in smaller companies such as Marlborough UK Micro Cap (GB00B02TPH60), managed by Giles Hargreave or Standard Life UK Smaller Companies Trust (SLS), managed by Harry Nimmo, which has a 23 per cent exposure to Aim companies. Both funds are members of the IC's Top 100 Funds, While they can be held in an Isa, they would not qualify for an inheritance tax exemption.
