SAGA — Doing things properly

From little acorns

All investors dream of investing in a small company and watching it turn into a large company with the profits and share price to match. So it is no wonder that the Alternative Investment Market (AIM) has been much watched since it was set up in 1995 to allow small companies not eligible for a full listing to nonetheless trade their shares publicly

There are now 1,500 shares listed on AIM, some of which have fulfilled many investors' dreams, repaying their faith with spectacular returns. Shares in online advertising firm 121 Media rose more than 600% between February and October 2006, for example. Still, not all AIM investments work out.

Given that you need no trading history, no minimum value and no minimum number of publicly traded shares to be allowed to list on the exchange there is plenty of room for bad companies to sit alongside more worthy investments, something that was reflected in the overall performance of the index in 2006.

By mid-October the FTSE 100 was up over 5% on the year but the average AIM listed stock was down over 10% and 25% off its May levels.

However there is still good reason to think about bearing the risk that comes with investing in AIM stocks - any gains you make could end up coming to you or to your heirs tax free.

If you hold an Aim-listed company for two years you will pay tax on only 25% of your capital gains (this means that a higher-rate taxpayer will end up with an effective rate of 10% rather than the usual 40%). Perhaps of more interest however, given that more and more people are being dragged into the inheritance tax net, is the fact that after being held for two years AIM listed shares become entirely free of IHT: when you die they will pass on to your heirs without a penny going to the Treasury.

The only problem with the deal is that while there are many good funds that invest in AIM stocks about (the Rathbone Special Situations fund, and the F&C UK Smaller Companies fund are both good) investments in them are not eligible for the tax relief. So if you want to cut your tax bill you have to choose your own investments.

You can get a stockbroker to help you with this - many offer AIM portfolio services. This is not a cheap option (they tend to charge 5% up front and 1.75-2% a year in fees for example) but if they manage to save you 40% in IHT you may think they cheap at the price. Otherwise the individual stock picker will still find many solid companies listed - more than 50% yield over 3% and companies such as wine merchant Majestic and pub group Young and Co.

These shares are less small companies, more AIM-listed blue chips. Buying and holding both could bring you some Christmas cheer and will very probably also make your heirs remember you fondly in Christmases to come.