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Could stamp duty move bring small caps back in favour?

Smaller companies have welcomed the Government’s plans to abolish stamp duty on shares traded in growth markets, but how much will the move rouse interest from retail investors?

In his Budget 2013 speech, chancellor George Osborne announced the 0.5 per cent stamp duty on share transactions in growth markets will be scrapped from April 2014.

The change is designed to encourage more investment in growth companies to create an important capital injection for small to medium-sized enterprise equity markets.

BlackRock UK Smaller Companies fund manager Ralph Cox says many of the UK’s most exciting smaller growth companies are listed on Aim.

Cox says: “The Government’s decision to abolish stamp duty for Aim companies should have the positive twin effects of increasing investor appetite for these shares and helping attract and direct investment capital into UK small businesses and therefore the broader UK economy.”

Deloitte head of securities tax Michael Quinlan agrees, saying: “This change in policy makes London even more attractive for small caps and IPOs, particularly in view of the financial transaction taxes recently introduced in France and Italy, and the European Commission’s proposal for financial transaction taxes across 11 EU member states from January 2014.”

However, advisers have mixed views when it comes to retail investors being directly involved with smaller companies.

AWD Chase De Vere head of communications Patrick Connolly is supportive of the move but warns of the dangers when investing in smaller companies listed on Aim.

Connolly says: “Smaller companies are not only less secure than larger companies with less financial backing, but their shares are also more illiquid, with less people willing to buy them when times are hard. This means it can be difficult to sell when you want and at the price you want.”

Connolly gives the example of when the FTSE Aim All-Share index stood at 2,925 on 3 January 2000. Today it is at only 743 – a fall of 75 per cent over 13 years.

He points out the index fell by a “staggering” 62 per cent in the six months from 8 June 2008 to 8 December 2008 and warns losses of this size are too great for most retail investors to withstand.

Connolly says: “We are broadly supportive of the consultation to allow Aim share investments in Isas and the proposed removal of stamp duty, although we have concerns that some investors could end up taking more risk than they realise.

“There is the potential to make big gains but also the risk that you could suffer major losses.”

Connolly says investing in Aim shares is only suitable for wealthier individuals who are prepared to accept the high risks involved and even then it is only suitable for a small proportion of their overall investment portfolio.

He adds: “Aim shares are very high risk which is why the Government has offered such generous tax benefits for those investing in Aim portfolios or through VCTs, because they are not usually suitable for a typical retail investor.”

Bestinvest managing director Jason Hollands says the plans to include Aim shares and stocks is good news for those investors who prefer to trade individual stocks and shares rather than invest through funds.

Hollands says: “It is however important to stress that these companies are often higher risk investments than large established businesses, the standards required of companies are less exacting and trading liquidity can be poor, so they will only be suitable for certain investors.”

Hargreaves Lansdown senior manager Adrian Lowcock supports investing in smaller companies but is concerned about how they react to sudden changes in sentiment. If there is a downturn in the market or a period where risk aversion returns, smaller companies are likely to be more affected than larger businesses.

Lowcock says: “Smaller companies tend to be more sensitive and they tend to get more illiquid so if there is a big sell off that liquidity will knock on to lower prices.”

Lowcock adds scrapping stamp duty will change the market and argues every investor should have some exposure to small companies in their portfolios.

He says: “Investors should look at smaller companies now. But it is clear that stock selection and expert investment knowledge are essential when it comes to investing in Aim. Individual shares in smaller companies can be very high risk and that is why you want a portfolio manager to have a diversified portfolio, so you are not having individual stock specific risk unnecessarily.”

AJ Bell chief executive Andy Bell says: “The combination of abolishing stamp duty reserve tax with allowing Aim shares to be held in Isas is going to open up a significant investment market to a number of growing companies.

“We expect a surge in popularity once the Aim restrictions are removed and the cost of investing goes down.”

Albion Ventures managing partner Patrick Reeve says: “Aim is the magnet that attracts smaller companies towards venture capital funding. In recent years Aim has lacked the necessary power to fulfil this role effectively but the chancellor’s announcement to scrap stamp duty on growth markets such as Aim provides a much-needed fillip.”

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