Shares: Brown's AIM reforms could lead investors astray

week ahead

IN A throwaway line in last week's Budget, Gordon Brown announced a series of changes that will have a profound effect on how private investors approach the Alternative Investment Market.

The measures, which abolish tax breaks for established AIM companies but increase them for small start-up firms, are intended to divert the cash coming into the market to the firms that need it most.

Some have been sufficiently surprised by the changes to suggest that they might prompt the collapse of the Stock Exchange's junior market, which was set up to cater for small start-up companies, well before its third birthday.

In fact, the toddler looks set to survive for a while longer. However, there is a real risk that the changes could tempt investors away from good investments into poor ones, simply because of the tax breaks on offer.

In another twist, the Chancellor delayed the changes so they do not come into force until the tax year ends in a fortnight's time. So stockbrokers are on standby for a flurry of activity as punters take advantage of the existing tax breaks while they still can. Once again, the risk is that investors pay over the odds to take advantage of the tax breaks and get their fingers burned.

The most far-reaching change is the abolition of reinvestment relief. This tax break, which was introduced to encourage investors into the AIM market when it was set up, allows shareholders to avoid capital gains tax as long as they reinvest the proceeds of their investment in a qualifying AIM company. At the moment, about half the companies on the exchange qualify.

This change applies to all quoted companies. To cushion the blow, however, the Chancellor decided that reinvestment relief would still be available for companies that are coming to the market, provided they are below a certain size. As an extra bonus, investors in these firms will also qualify for 20 per cent tax relief under the enterprise investment scheme.

The numbers are compelling. For example, assume you sold some shares with a pounds 10,000 capital gain. Put the proceeds into one of the qualifying AIM new issues, and you save yourself a CGT bill of pounds 4,000. What's more, you then a get a tax rebate of pounds 2,000. So you have effectively paid just pounds 4,000 for an investment worth pounds 10,000.

All well and good. But what happens when the shares starts trading? Suddenly, they are no longer eligible for tax relief. And that means that other investors may not want to pay the same price that you paid and the shares could slide.

The simple lesson is that if you need a big tax break to be encouraged to invest in a share, you're probably going to get burned.

The same applies to buying shares before the changes come into force on 6 April. Investors with a CGT liability to shelter can do so by buying one or more of the qualifying AIM stocks in the next two weeks.

Once again, however, be careful. A number of AIM stocks have been driven up by precisely this factor in recent months. David Porter at the AIM stockbroker BEST Investments points out that shares in the garden centre group Dobbies have risen by 25 per cent so far this year while Fountain Forestry has put on 45 per cent. Neither of these rises has much to do with fundamentals, so both shares, and many others, could fall back once the tax relief goes.

The March reporting season is still in full swing this week. Kicking off today is building materials group Caradon, which is expected to report pre-tax profits of about pounds 147.5m, down from pounds 178m last time. Analysts will be watching closely for signs of a slowdown in the construction industry.

As usual, media analysts will largely ignore Flextech's figures tomorrow and concentrate on what the TV broadcaster has to say about future deals. Chief executive Roger Luard is believed to be close to a deal with BSkyB in which the satellite broadcaster would show Flextech's package of programmes on its digital satellite service, which launches in June.

The company is also talking to Microsoft about launching an interactive service using the US giant's WebTV software. For the record, losses are likely to come in at about pounds 5.3m.

The glare of publicity on Newcastle United will intensify tomorrow as the football club releases its first set of half-year results since flotation. Following a new string of allegations over the weekend, investors will be wondering if errant directors Freddie Shepherd and Douglas Hall will resign, or whether the scandal will prompt the company's three non-executive directors to hand in their notice. Analysts expect pre-tax profits of pounds 8.5m.

Housebuilders will get plenty of attention this week as Barratt Developments and Beazer report their half-year figures on Wednesday and Thursday respectively. Analysts will be asking the two to repeat earlier positive comments from other players. Barratt is expected to report profits of pounds 30.9m, up from pounds 24.8m in the previous year, while Beazer should come in with pounds 30.5m, compared to pounds 23.8m.

On Thursday, retailer Next is expected to continue to show other retailers the way with a set of sparkling 1997 figures. NatWest, the stockbroker, expects profits of pounds 182m, up from pounds 156m in the previous year.