For those who dare: Aim shares for your Isa

From Monday 5 August the rules are changing, so you can put Aim shares in your Isa but should you snap them up? See what the experts say.

July 31, 2013

by Katie Morley

For years, the Alternative Investment Market (Aim) has seemed as enticing as a camping holiday during a thunderstorm. Dreary performance coupled with ultra high risk warnings has caused many investors to shun Aim shares, but several indicators suggest this could be about to change.

You can already hold funds that contain Aim shares in your individual savings account (Isa), but from Monday 5 August, for the first time ever, investors will be allowed to hold individual Aim shares in Isas. They are already allowed in self-invested personal pension (Sipp) tax wrappers but have, until now, been excluded from Isas because of their risky nature.

The hope is that this change will boost the market and put Aim shares on a level playing field with other types of shares, which are more commonly bought. The great thing about holding qualifying Aim shares in an Isa is the triple tax break: no income tax, no capital gains tax and no inheritance tax (IHT). And next year, stamp duty will be removed from Aim shares - offering a quadruple tax break for qualifying Aim shares in Isas. If you hold Aim shares (with the exception of companies related to investment or property) for two years, they are exempt from IHT.

So Aim shares suddenly start to look highly attractive. But is this rule change a reason to take the plunge and invest in a bunch of companies you've never heard of before? Not necessarily, says Tom Stevenson, investment director at Fidelity. Unless you're used to dealing individual shares and doing the kind of homework required to trade successfully, steer well clear.

Watch our video interview with Tom Stevenson and Paul Mumford

As you'll know, if you're already familiar with the Aim market, Aim shares are seedling companies on a turbulent journey of growth - many of which disappear along the way. This combined with looser regulation makes Aim a high risk market to try to make money from. There have been major success stories such as Majestic Wine (MJW) and ASOS (ASC), but these have been few and far between.

However, Paul Mumford, manager of the Cavendish Aim Fund (GB00B0JX3X39), is optimistic about the market. He says Aim is already maturing, making things easier, and he adds that the inflow of capital as a result of the Isa rule change will be "massive". For those after a higher than average risk/reward, Aim has much to offer.

He says the Aim market can give you superior access to sectors such as oil and gas. He likes Ithaca Energy (IAE), a developing North Sea oil producer which sells shares at one times cash flow.

He's also enthusiastic about Faroe Petroleum (FPM), an oil company operating in Norwegian part of the North Sea. Faroe Petroleum cashes in on the fact the Norwegian government puts 80 per cent of its drilling costs straight back into its pocket. And once it is established, it can farm out its services and make even more profit.

Read our our interview with Paul Mumford

Meanwhile, Mr Stevenson likes Rockhopper (RKH), a company planning to produce oil in the Falkland Islands in about three or four years. When it finally does, it will rise in value or be bought.

Mr Stevenson also likes the secondary property market. He says the vast difference in valuation between the prime market and the rest make it interesting and he has found some attractive yields on secondary properties. Online property company Conygar (CIC) is very cheaply valued relative to assets, and is one of his favourites.

Finally, he points to a unique company called Snoozebox (ZZZ), which provides temporary accommodation for big events such as the Olympics and the Jubilee celebrations. Although Snoozebox shares have been under pressure following the recent departure of senior management, Mr Stevenson thinks the share price should be supported by the company's assets, which consist of a fleet of mobile accomodation units, and that a fundraising has improved the company's financial position leaving it well positioned for growth. But Snoozebox's collapse in valuation from close to £100m in January to around £23m now amply illustrates the risky nature of Aim companies. Investors Chronicle holds a very different view of the company. After the revelation of big losses earlier this year and the exit of the chief executive and the finance director, we rate the shares a sell.