Untitled DocumentVenture Capital Trusts (VCT's)
VCT's were introduced back in 1995 during John Majors Conservative Leadership and although the tax breaks have changed over time, there remain significant advantages for investors. The current structure allows for a 30% tax rebate, whilst gains and income achieved by the VCT are free from income and capital gains tax.
For those who can tolerate risk and invest for a minimum period of five years, Venture Capital Trusts (VCT's) represent a particularly tax efficient solution. There objective is to invest within UK Companies employing no more than 50 individuals and whose net assets are smaller than £7,000,000 at the time of investment (qualifying investments). Naturally, smaller company investment is considered at the higher end of the risk spectrum.
The tax advantages associated to this arrangement, especially the initial rebate, represent significant compensation for the potential downsides associated to the underlying investments, but nevertheless, interested investors should only allocate smaller amounts of overall wealth to these products.
The management discipline of a VCT provider is somewhat different to more conventional investments. The manager's objective is usually to reduce risk rather than seek out star performing shares. Even with VCT's there are examples of both lower and high-risk strategies, but the underlying companies held with the trust tend to have significant assets and predictable income streams. There are more specialist examples that feature a single investment sector - Entertainment or Technology for example. Broadly speaking, less diversified investments have a greater risk.
To maintain qualification as a VCT, the provider has 3 years in which they must invest at least 70% of the trusts assets in qualifying companies. It is not uncommon for the trust to hold large cash balances of circa 25% for the remaining two years. Generally speaking there is no set maturity date associated to a VCT, but it must be held for at least five years to qualify for the tax concessions.
One of the disadvantages associated to VCT's is liquidity. It can prove difficult for the manager to sell the investments quickly and it can take sometime to repay investors. It would be common for the VCT to convert to a more flexible structure on the fifth anniversary, allowing the manager significantly wider investment scope. This increases the potential for new investment, which increases the liquidity position considerably.Often VCT providers will operate a 'buy back' scheme, but this can be at a discount to the value of the investment you hold.
In view of the liquidity issue, you really must only consider this style of investment for the longer term. Although it takes five years in which to benefit from the tax concessions, it is likely that you will need to hold the investment longer to maximise benefits and receive a return of your capital.
There is a maximum investment of £200,000 in any one year. In many cases, VCT providers will have a minimum payment of £5,000 or thereabouts.
Charges vary and very often 'you get what you pay for', but broadly speaking the cost is 3% of the amount invested plus whatever commission you agree with your financial adviser.
Annual charges are circa 2%, normally with 0.50% rebated to your financial adviser each year
The investment team at Sterling Financial Services actively reviews Venture Capital Trusts. If you want to consider this style of investment further please contact your normal adviser.
Naturally, smaller company investments are considered to be at the higher end of risk spectrum; therefore, VCT’s should only be considered by experienced investors.
