AIM shares have been eligible for Individual Savings Accounts (ISAs) for more than a decade, and it appears to have had a positive effect on liquidity on AIM. There are potential changes to ISAs suggested by the Quoted Companies Alliance, and they were also mentioned in a recent Labour party document on the strategy to improve UK capital markets.
These changes could benefit AIM companies if they are actioned. The underlying idea is to encourage more investment in British companies and make investors interested in local businesses. How much of any additional cash would go into AIM companies is uncertain, though.
Owning shares in an ISA is a benefit for investors because they will not be subject to tax on dividends or on the gains made on the investments. All shares traded on AIM are eligible for Stocks and Shares ISAs.
AIM shares were first allowed in ISAs in August 2013 – previously some were eligible because they were also traded on another market. As I have written before, there was an immediate upturn in trading in AIM shares after they became eligible for ISAs. The value of trades on 5 August 2013 was £123.3 million, nearly £50 million above the previous day’s level.
The average daily trading value in 2013 was £156.5 million, rising to £223.5 million in 2014. The value of trades can be affected by large deals, such as share placings by existing shareholders or purchases by potential bidders. The number of trades tends to be a better, but not foolproof, indication of how active smaller investors are.
For the first 12 months of the inclusion in ISAs, average daily trades in each month was higher than the corresponding period in the previous year.
In 2023, the average number of daily trades was 39,416, still much higher than the 25,396 and 34,445 in 2013 and 2014 respectively. Yes, last year’s trades were less than 50% of the 2021 pandemic stock market boom, but they held up relatively well compared with other years.
Daily and monthly trading numbers can vary substantially, but it is an indication of how ISAs appear to have increased interest in AIM shares.
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The AIM performance was strong during the first few weeks after the ISA rules change and by the end of 2013 the FTSE AIM All-Share index had risen by 14%. The index fell in 2014 but there was still more trading in that year. The performance has more to do with the underlying market.
The entry of AIM shares into ISAs also meant that holders of shares in Main Market companies that switched to AIM did not have to sell their stake to comply with the previous regulations. This helps the share price just before and just after the move, although there is still some selling by investors that do not want to or are not allowed to own AIM shares.
The QCA (Quoted Companies Alliance) has released a report, Generating growth in quoted companies, which has proposals for the upcoming Spring Budget on 6 March that could announce initiatives to increase interest and liquidity in smaller companies. This includes suggested changes to ISAs and their regulations, as well as a new UK Growth Trust.
As well as scrapping stamp duty on share trading for companies outside the FTSE 100, the QCA believes that there should be a simplification of ISA products by combining Cash ISAs with Stocks and Shares ISAs. The organisation argues that this would make it easier for investors to switch between cash and shares.
There is currently £285 billion invested in Cash ISAs and even a small proportion of that going into shares could provide a boost to liquidity. Even an extra £1 billion going into AIM shares is well over 1% of the current market capitalisation of the market. At the end of 2023, AIM’s market capitalisation was £79 billion.
The total amount traded was £50.2 billion in 2023, which was below the £56.5 billion in 2014, the first full year of AIM share inclusion in ISAs. Because ISA investments are likely to be smaller, an additional £1 billion of trading would have an even greater effect on the number of trades.
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The QCA also suggests that more of the ISA investment in shares should be going into British businesses so that the investment is benefiting the UK economy. Of course, it hopes that a significant proportion would go into small and medium-sized companies, but larger companies would probably benefit more. The British Growth Fund also supports the idea.
The QCA’s idea it puts forward is to impose a 50% minimum threshold for investment in UK stocks so that at least as much is invested in UK companies as in overseas companies. There is a suggestion that the investment should be renamed BRISA to reflect the British focus.
How British companies will be defined is not covered in the proposals. There are companies that have head offices in the UK, but all their businesses are outside the country. Mining and oil and gas companies come to mind, but there are also industrial companies with limited exposure to the UK market.
Where the head office is situated is the obvious way of defining that they are British, and it would be the simplest way. Using financial measures would mean that they would change year on year and a company could be eligible one year and not the next, which would cause confusion.
Of course, “British” may be defined as a company quoted on AIM or the Main Market because they are London markets, but that would include overseas companies. There are still 101 international companies on AIM, which is less than 50% of the number 10 years ago. That would include the Channel Islands and Isle of Man, as well as European, US, Australian and Canadian companies.
Then again, a UK business might have a Channel Islands holding company, but that could be changed if the benefits of the BRISA were thought to be worth it.
The QCA also believes that the annual allowance should rise from £20,000 to £25,000. The allowance has not changed since the 2017-18 tax year when it increased from £15,240.
Not everyone uses their full allowance in Stocks and Shares ISAs, but it is estimated that 802,000 people used the full allowance in the 2021-22 tax year. Some of these may have additional capital to invest each year.
Earlier this year, Labour published Financing Growth – the party’s plan for financial services. An advisory panel including directors of investment management and insurance companies and David Schwimmer, the chief executive of the London Stock Exchange Group, provided strategic guidance for the review.
Part of the section relating to reinvigorating capital markets does mention ISAs near the end of the report when talking about retail shareholder participation in capital markets. They would be part of a strategy for a modern “Tell Sid” campaign (the British Gas flotation promotional campaign from 1985) to encourage people in this country to buy shares in British businesses.
The Labour party also talks about simplifying ISAs “to make it as easy as possible for people to feel the benefits of saving and investing their money, including through increased utilisation of stocks and shares ISAs”.
This is fairly vague and is part of the overall strategy including encouraging pension funds to put more of their cash in UK assets.
Just like the QCA proposals it is difficult to assess how much of a benefit there could be for AIM companies. If the proposals do manage to encourage additional money going into shares, then that could boost the performance and liquidity of the overall London markets and there should at least be a knock-on effect on AIM.
The proposals for ISAs provide promise for further additional investment in AIM shares, but there is no guarantee that money switched from Cash ISAs will go into AIM shares.
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