Are Venture Capital Trusts Good to Invest in?
So what is a VCT?
Venture Capital Trusts (or VCTs as they are known) are one of the least understood investment products in the market. Yet, for the right investor, they are also one of the most attractive, combining the potential for good returns with substantial tax advantages. Today’s article gives an overview of this important investment vehicle.
Background
VCTs were introduced in 1995 to encourage individual investors to invest in UK smaller companies. The Government achieved this by offering investors in VCTs a series of very attractive tax benefits. As a result more than £3.2 billion has been invested in VCTs between 1995 and 2007.
Here are some key points and how to get 30% tax relief from the Government to prime your investment pump too…
Key Points and Advantages
- 30% upfront income tax relief on amount subscribed
- Has to be held for 5 years in order that tax relief is not reclaimed by HMRC
- Tax free growth in value of investment
- Tax free dividends
- Maximum amount £200,000 in any one tax year
As with everything there are good and bad VCTs so it is important to look for a fund manager who can provide evidence of strong performing VCTs which also pay good dividends.
Investment
VCTs have to invest in smaller, and therefore potentially more risky, companies. The following rules apply to VCTs and the companies they invest in…
- Any company can have no more than 37m gross assets before any VCT investment.
- No VCT can invest more than £1m into a company in any 12 month period.
- Some activities are excluded. For example, dealing in land, property development, legal or accountancy services, hotels, leasing, farming or forestry.
- No company can have more than 50 full-time employees.
- No company can receive more than £2m from VCTs established after 6th April 2007 in any 12 month period.
Why Invest in Venture Capital?
The fundamental rationale for investing in venture capital is to enhance the risk and reward characteristics of your investment portfolio. This can be achieved in a number of ways:
- Long-term historical out-performance
- Absolute returns
- Portfolio diversification
Long Term Historical Performance
The long term returns of venture capital have been higher than the returns from investing in UK larger companies. Please remember that past performance is no guide to future performance.
Historically, venture capital has typically only been accessible to institutional investors (like pension funds) and very wealthy investors. Now the introduction of VCTs has allowed individuals to access this type of investment, while at the same time limiting risk through a combination of portfolio diversification and upfront income tax relief.
Absolute Returns - Can you Bank on them?
The only reason a venture capital fund manager will invest your money in an individual company is because they believe that the company in which they are investing is undervalued. This is in marked contrast to most investment funds, which are designed to deliver a return against a stock market benchmark, irrespective of which way that benchmark moves e.g. a traditional fund manager may consider that he has done well if his fund has only lost 15% against an index which is down by 25%. A venture capital fund managers job is to seek out those “diamonds in the rough” for you, which others might normally pass right by.
Portfolio Diversification Lowers Risk
Introducing venture capital into your portfolio should also help improve diversification for you. This is because venture capital tends not to move in the same cycles as other investments. An investment in venture capital could also help lower the risk profile of the portfolio because you are not putting all your eggs in one basket and investing in a narrow market such as the FTSE 100.
As IFAs we are able to research the market and show you the best performing VCTs but as ever, please remember that past performance is no guide to future performance. An investment in a VCT can fall as well as rise, and you may not get back the full amount invested. Tax rules and regulations are always subject to change. If you want to talk through some of the issues and benefits involved in this often overlooked investment instrument give me a call on 0800 321 3508
Leave a Reply