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Tom Bailey asks: The AIM market was designed for smaller companies, but it is now home to many billion-pound businesses. Why don't these larger companies move on?

Andrew Hore (pictured above), award-winning AIM writer, says: When the London Stock Exchange (LSE:LSE) launched AIM more than 25 years ago, it never intended for large companies to remain on the junior market. It was always viewed as a stage prior to a Main Market listing, so that the companies could graduate to a full listing. Around 200 companies have moved from AIM to the Main Market over the years – although many more have moved back to AIM. 

Companies are attracted by the tax benefits of AIM, the profile it gives them and the ability to speed up deals. At the end of 2020, there were 24 AIM companies valued at more than £1 billion, which appears to be a suitable size for a move from AIM. 

Raising money via Venture Capital Trusts (VCT) and the Enterprise Investment Scheme (EIS) is not available to the larger AIM companies, although VCTs would have to sell qualifying stakes within five years of a move to the Main Market. 

Inheritance Tax

However, shareholders in these larger AIM companies can benefit from Inheritance Tax (IHT) relief, also known as business property relief, and Capital Gains Tax (CGT) reliefs. 

If qualifying AIM shares are held for at least two years, then they are not subject to IHT on the owner’s death. That could save up to 40p in the pound. Not all AIM companies qualify, though, and investors need to check. 

AIM qualifies for IHT relief because it is not deemed to be a designated recognised stock exchange, such as the Official List of the London Stock Exchange, and the shares are deemed to be unlisted. 

Many fund managers provide AIM IHT portfolios. They tend to buy larger, dividend-paying companies, so this does not have as much effect on demand for big companies such as online retailer ASOS (LSE:ASC), which does not pay a dividend, although it may be included in portfolios of individual investors. Fevertree Drinks (LSE:FEVR) is more likely to be in these portfolios. 

There are suggestions that between one-fifth and one-third of money invested in AIM is for tax-planning reasons. 

If a company moves from AIM, the IHT benefit is no longer valid. This means shareholdings would have to be sold and the money transferred into another qualifying investment to regain IHT relief.

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Other benefits

Entrepreneurs relief for CGT is available for shares in both AIM and Main Market companies, although CGT gift tax relief is only available for AIM-quoted shares. 

Many directors and founder shareholders still have significant stakes in AIM companies, and they would lose out financially if they lost the tax benefits. Fevertree founders have already sold down their stakes in the company. 

Since AIM shares were allowed in ISAs from August 2013, this has negated what was previously just a benefit of companies which had a full listing. There is no stamp duty on AIM transactions, though. 

These are all benefits that provide additional attractions for investment in AIM shares. 

Why would a company leave AIM?

The benefits of moving to the Main Market include access to additional investors that do not invest in AIM companies. That includes so-called index funds, or trackers, who would have to buy shares if a company is included in a FTSE index. ASOS would certainly be eligible for the FTSE 250 index and it does sometimes trade at a market capitalisation that would give it a chance of getting into the FTSE 100. 

But the so-called Main Market of the London Stock Exchange has two types of listing – premium and standard. To qualify for admission to the FTSE indices, a company must have a premium listing. This is expensive and companies must meet the highest standards of regulation and corporate governance.

Buying by index trackers might be offset by investors who sell because they no longer gain the tax benefits. There would be access to greater amounts of cash for corporate expansion, but the likes of ASOS and fellow online fashion retailer Boohoo (LSE:BOO) have never found that a problem on AIM.

Easy deals

From a corporate point of view, larger acquisitions and deals in relation to the size of the company can be made on AIM without the need to gain shareholder approval. That means the company does not have to send out a costly circular. This is less significant for larger companies, though. 

A Main Market move could further enhance a company’s profile. However, do not underestimate the benefits of being a big fish in a small pond. ASOS and Boohoo are already well known. AIM’s highly valued hydrogen economy companies ITM Power (LSE:ITM) and Ceres Power (LSE:CWR) could provide Main Market investors with an investment option they do not already have, but they have only recently soared to high valuations. 

It should be noted that the tax benefits of AIM companies are being reassessed by the government. Both IHT and CGT could be changed or even removed. That may make ASOS and the other larger AIM companies think more carefully about a move to the Main Market. 

The London Stock Exchange would probably prefer that larger AIM companies, like ASOS and Fevertree, moved to the Main Market, but they appear happy to stay where they are for the time being.