As of August 5th, 2013, it is now possible to make even bigger profits with UK AIM shares.

This article explains what AIM shares are, what you have to do to take advantage of the recent UK tax rule changes and a few things that you need to be aware of before you go mad and start buying lots of AIM shares!

What Are AIM Shares?

AIM is an abbreviation for the Alternative Investment Market.

This is a UK stock market, which works in a similar way to the better-known UK FTSE main index but has different listing rules.

Essentially, this means that it is easier and cheaper for small companies to float their shares on the AIM market than it is for them to float on the FTSE.

For you, the private investor, this means that the AIM market consists of smaller companies, commonly known as penny shares or penny stocks.

And you have probably heard that smaller companies in the earlier stages of their development have a tendency to grow faster than their larger blue-chip FTSE 100 counterparts.  Fantastic!

Unfortunately, it also means that they are more likely to go bust, causing you to lose all of your money invested in them – OOPS!

You can see what I mean if you take a look at the best and worst AIM performers in 2011 and 2012.

So it’s important to be aware of the pitfalls when investing in AIM shares, which I will talk about later.

Recent Changes To UK Tax Rules

As of August 5th 2013, AIM shares can now be held inside a stocks and shares ISA (Individual Savings Account), which was not the case previously for most of them.

UK shares on the main FTSE market have always been able to be held inside an ISA, as could overseas (international) shares, for example those held on US and European stock exchanges.

Those AIM shares that are dual-listed, i.e. trading on an overseas stock exchange as well as the UK AIM could be held in an ISA but those listed exclusively on AIM couldn’t.

Are you following this?

The point I’m making, is that the rules for AIM shares were unnecessarily complex and unfair as AIM shares seemed to be singled out for special ill treatment.

Private investors, who are the people that invest the most in penny shares (large institutions, fund managers, pension funds, etc. tend to avoid them) have long campaigned to get these tax rules changed and have now, finally, got what they want.

Tax-Free Investments

The big advantage of these tax rule changes is that UK taxpayers will no longer have to pay income tax on the dividends that you receive on your stocks and shares held inside your stocks and shares ISA.

Furthermore, you will not have to pay any capital gains tax on the investment growth resulting from rising share prices either.

Not only does this have the obvious advantage of lowering your investment costs and avoiding the complex job of calculating the capital gains on your share investments for your tax return but it also means that you will now make bigger profits from the capital gains and dividend income.

It also means that your money will grow faster because it will compound at a higher percentage rate when you re-invest your gains and dividends.

Compound interest is a subject all of its own so I’m not going to explain compound interest here, however, if you’d like to learn more about it, then see this article where I explain the subject in more detail.

There are also a number of restrictions to be aware of when investing in a stocks and shares ISA, which you can read about here.

A Few Things To Be Aware Of When Buying AIM Shares

As I mentioned earlier, AIM shares are penny shares and are therefore not generally recommended for beginners.

That said, beginners that are attracted to investing in shares by the opportunity to make quick profits are obviously attracted to them.

That is, until they lose there money a few times on bad purchases and that makes them think twice.

Penny shares are generally much higher risk than FTSE 100 blue chips because of their much smaller company size, shorter track record in business, faster growth, riskier business models and involvement in more speculative industries such as technology, natural resources exploration, bio-technology, etc.

Other risks such as fewer shares in circulation, larger spreads between the buy and sell prices and potential dominance of a single investor that can often occur are other factors to consider.

But the rewards, when your investments pay off can be HUGE – like Energy Technique, a manufacturer of heating, cooling and ventilation products for industrial use, which rocketed from 4p to 65p during 2012.

Have a dabble by all means but I wouldn’t risk putting all of your eggs into the one basket!

How To Invest In AIM Shares

At How To Invest In Shares, we are big fans of anything that enables taxes of any kind to be avoided legally.

Personally, I hold as many of my savings and investments in tax-efficient vehicles as possible and the ISA is one of these vehicles that I use.

If you’d like to know more about how to use ISAs to shelter your AIM shares from tax, then why not access a copy of my free guide below?

Alternatively, If you have any questions or comments about stocks and shares, the AIM market, ISAs, etc. then please leave them below and I will answer…