Alternative Investment Market

Alternative Investment Market
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There has been a huge increase of interest in portfolios of Alternative Investment Market stocks recently, as AIM shares continue to qualify for business property relief and to be exempt from inheritance tax after they have been held for two years. Also, the taper relief rules means that you only have to pay 10 per cent capital gains tax after as little as two years. If in addition you require some capital gains tax shelter, it is important that you ask your stockbroker or financial adviser to ensure that some of the Alternative Investment Market holdings are Enterprise Investment Scheme-qualifying new shares issues, thus providing the valuable EIS relief which provides Capital Gains Tax deferral.

The broad trend of the Alternative Investment Market index since March 2003 has been upward. But the most significant change is the average size of company on the Alternative Investment Market. Whilst in the early years of the AIM they were almost all small-cap stocks with market capitalisation of less than £50million and very limited liquidity, in the past two years the average size of company has increased, liquidity in the larger AIM stocks has improved substantially and some are even starting to pay dividends.

A portfolio of some of the largest, most established companies on AIM begins to make a lot of sense. Get an experienced small-cap investment manager to put together a well balanced portfolio of say 20 or 30 holdings. These should be regarded as medium-term holds with the investment manager keeping an eye on the overall portfolio and selling from time to time, either to lock in a profit or if things have gone badly with one of the stocks, to get out while you still can.

There are “replacement” rules and five-year “look back” period to consider when death finally occurs. Few people understand how this works, let alone put into practice. Assuming you have held an Alternative Investment Market stock for at least two years, you can dispose of it and pay only 10 per cent capital gains tax on any profit you have made. If that holding is then replaced by another, the combined holding periods are added together for the purposes of the five-year “look back” period. Provided someone is holding unquoted stocks at the time of death and the combined holding periods of those an similar stocks is not less than two years in the five years prior to death, then they fall outside the estate for inheritance tax purposes and are deemed exempt.

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