AIM stocks for your ISA

As of Monday 5 August, investors can include shares in companies listed on the Alternative Investment Market (AIM) in an ISA. What does this mean for investors and the market, and which AIM-listed companies do brokers and analysts suggest for inclusion?

Why is this important?

Investors can place shares up to the value of £11,520 into a stocks and shares ISA in the 2013/2014 tax year, saving themselves from a potential capital gains tax liability while higher-rate taxpayers are protected from further income tax liabilities on dividends.

Outside of the ISA there is a further capital gains tax allowance of £10,900 for 2013/14, but any cashed-in gains above that value can be taxed at up to 28%.

To find out which three types of investors Andrew Pitts has identified as being most likely to include AIM shares in their tax-sheltered ISA, read:Should AIM be part of your ISA strategy?

Some AIM-listed shares could already be included in ISAs due to dual listing rules, which allow investors to include shares listed on HMRC-recognised overseas stock exchanges.

"Some very popular AIM shares, such as Xcite Energy and Range Resources had already been eligible ISA investments as a result of their dual listing - but opening up the range means that nearly 1,000 extra shares, including the very popular Gulf Keystone, Sirius Minerals, Bowleven and Sound Oil, all become available ISA options," comments Rebecca O'Keefe, head of investment at Interactive Investor.

"The ability to make significant capital gains on these volatile shares makes the benefits of ISAs very attractive, but investors should note that capital losses made within an ISA cannot be used to offset gains elsewhere."

Charles Stanley's Sean O'Flanagan highlights the fact that AIM shares can provide other tax cuts to investors, describing AIM as "one of the most tax-advantageous markets in the world".

Our resident stockpicker considers five more proven businesses that could be included in an investors' ISA portfolio. To find out which these are, read:Edmond Jackson's Stockwatch: Five AIM shares for an ISA.

"Certain AIM shares benefit from business property relief and gain exemption from inheritance tax once held for a minimum of two years," he explains.

But he warns that the tax benefits should always be seen "as an added benefit and not a reason to invest", and the investment merits of the company in question should always be the primary consideration when thinking of investing.

Solid investments

"AIM is home to many revenue-generative and dividend paying companies," comments Shore Capital's director of corporate finance Bidhi Bhoma, adding that such shares are solid investments to be placed in an ISA.

He recommends insurance provider Abbey Protection for its "solid dividend growth", as well as the "very well-capitalised" real estate company Telford Homes, scientific equipment manufacturer Judges Scientific, which has seen its share price rise "steadily from 100p in 2008 to [a current share price of] over 1400p".

In the mining sector, SP Angel analyst John Meyer suggests Goldplat, while finnCap's mining analyst Martin Potts says Petra Diamonds is one to watch.

He says Petra "is on the cusp of reaping the rewards of a three-year capex programme which will see it start to generate significant free cashflow within the [2013] financial year".

On the oil and gas front, Cenkos analyst Ashley Kelty recommends Plexus Holdings, which manufactures wellheads for high pressure/high temperature offshore oil and gas wells.

This technology has made the company "a key supplier" to such companies as Royal Dutch Shell, Total, Tullow Oil and BG Group.

Finally, finnCap's telecoms and technology analyst Andy Darley shares picks from the many AIM-listed technology companies.

These include telephone service provider Alternative Networks, which has a "solid and dependable focus on shareholder returns, with a significant cash balance to acquire growth", as well as security service provider Accumuli and information management company Ideagen.

Speculative buys

Riskier stocks can often be found in the natural resources sector.

These include miners Ferrex, recommended by Potts, Sable Mining Africa, selected by Brock Salier from GMP Securities, and Meyer's pick, Anglo Asian Mining.

Potts believes that Ferrex is worth investing in as "it has a number of milestones coming up in the near future which will provide significant drivers for the share price", including the first assay results for its Mebaga iron ore project in Gabon and the potential award of a mining permit for its manganese project in Togo.

Meanwhile, Meyer expects "a significant increase in the gold resource" at Anglo Asian's Gedabek mine in Azerbaijan and predicts that the next two years will see either the first dividend payments or the beginning of a share buyback scheme.

Darley's speculative technology picks include internet protocol TV solutions provider Amino Technologies, which is "undervalued" with a "very strong balance sheet", software company Idox and security company Corero Network Security.

He also recommends retail technology supplier K3 Business Technology, "which should reap benefits with retail sector improvement".

Another tech company to watch is Oxford Catalysts Group, which produces technology for converting gas into liquid fuel, and which one broker describes as "a leader in its field, addressing a global market, with an economically compelling offer to its customers."

Finally, Finncap's technology analyst Lorne Daniel suggests virtual training solutions provider SimiGon, which "has become a prime contractor in the defence industry" and counts the US Air Force and the UK's Ministry of Defence among its customers.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.