VCTS

We look at how these prod­ucts work and some suc­cess sto­ries from the sec­tor

Shares - - CONTENTS -

Ven­ture cap­i­tal trusts of­fer sig­nif­i­cant tax ben­e­fits but are they suit­able for all in­vestors?

The new ven­ture cap­i­tal trust (VCT) of­fer sea­son is now in full swing where in­vestors are able to ap­ply for new shares and en­joy im­me­di­ate tax ben­e­fits.

Re­cent of­fers from Amati AIM VCT, Oc­to­pus AIM VCT and Hazel Re­new­able En­ergy VCT have al­ready closed, hav­ing hit their sub­scrip­tion tar­get. Oth­ers are fill­ing up quickly.

Each year VCTs seem to at­tract money faster than the pre­vi­ous year, mean­ing in­ter­ested in­vestors need to act fast once of­fers go live.

This ar­ti­cle will ex­plain all the es­sen­tial points about why and how to in­vest in VCTs, plus the im­por­tant points to note if you want to lower the risk of los­ing money.

WHY WOULD YOU WANT TO IN­VEST IN A VCT?

Ven­ture cap­i­tal trusts are funds that al­low in­vestors to claim up to 30% in­come tax re­lief on up to £200,000 in­vested in a VCT per year. You need to hold the in­vest­ment for at least five years, but any div­i­dends will be tax free and you will have a cap­i­tal gains ex­emp­tion on dis­posal.

The tax ben­e­fits are essen­tially com­pen­sa­tion for tak­ing on the ex­tra risks of in­vest­ing in growth com­pa­nies, some of which could be early-stage busi­nesses.

WHO IS BEST SUITED TO IN­VEST­ING IN A VCT?

In­di­vid­u­als on higher-rate or ad­di­tional rate tax bands are nat­u­rally drawn to VCTs be­cause of their tax ben­e­fits.

VCTs can also be of in­ter­est to some­one who wants to in­vest in early stage growth com­pa­nies or in­di­vid­u­als who have maxed out al­lowances on var­i­ous wrap­pers such as ISAs and hit or ex­ceeded the £1.03m pen­sion life­time al­lowance.

These funds are pop­u­lar among in­di­vid­u­als seek­ing to sup­ple­ment their in­come be­cause div­i­dends and re­turns from sell­ing down cap­i­tal are tax free.

Stu­art Veale, manag­ing part­ner at as­set man­ager ProVen, says VCTs are not sim­ply the do­main of high net worth in­di­vid­u­als, not­ing that the av­er­age in­vest­ment size in its prod­ucts is £12,000 and that many in­vestors opt for its min­i­mum £5,000 sub­scrip­tion.

Hugi Clarke, a di­rec­tor at VCT provider Fore­sight, says there are two ob­vi­ous can­di­dates for the VCT mar­ket. One is some­one try­ing to re­solve a per­sis­tent tax prob­lem; the other is some­one with a one-off ex­cep­tional tax

charge as you can use the 30% re­lief to re­duce your tax bill.

‘It is be­com­ing quite com­mon for peo­ple to face life­time al­lowance is­sues,’ says Clarke, re­fer­ring to the limit on the amount of pen­sion ben­e­fit that can be drawn from pen­sion schemes and paid with­out trig­ger­ing an ex­tra tax charge.

‘In­di­vid­u­als in this sit­u­a­tion may have ei­ther built up a size­able pen­sion pot, or they’ve trans­ferred out of a de­fined ben­e­fit scheme with a sub­stan­tial sum of money.’

One so­lu­tion for any­one in this sit­u­a­tion who is still sav­ing for re­tire­ment is to put fur­ther con­tri­bu­tions into a VCT rather than a pen­sion as it is more tax ef­fi­cient in such cir­cum­stances. It is very im­por­tant to un­der­stand the risks if tak­ing this route.

LONG-TERM BEN­E­FITS

VCTs can also ben­e­fit in­di­vid­u­als who haven’t hit the pen­sion life­time al­lowance, as­sum­ing they are happy to let their money grow and don’t need to ac­cess it in the near-term.

For ex­am­ple, a 40 year old could in­vest money into a VCT and get 30% tax re­lief. Af­ter five years they can rein­vest the pro­ceeds of that first VCT into a new prod­uct and get an­other 30% tax re­lief. If they re­peat this pat­tern, the in­di­vid­ual could have in­vested in five VCTs backto-back in five year batches and en­joyed con­sid­er­able tax re­lief by the time they turn 65.

They could then take this money as a tax free lump sum in re­tire­ment or keep the money in­vested in a VCT and draw tax free div­i­dends as an in­come.

The down­side of the lat­ter strat­egy is that VCT in­vest­ments may be too risky for some­one of that age. And don’t for­get that you shouldn’t in­vest in some­thing for the tax breaks alone.

WHO SHOULDN’T IN­VEST IN A VCT?

VCTs should be avoided if you need to ac­cess your money in less than five years and if you don’t have the stom­ach or pa­tience for ex­po­sure to earlystage busi­nesses.

Sell­ing be­fore five years is up will re­quire you to pay back the 30% tax re­lief to the tax­man. You also have to con­sider there isn’t al­ways a liq­uid mar­ket for VCTs as most peo­ple only buy them in an of­fer pe­riod and don’t trade them on the mar­ket. That said, some VCT providers do of­fer to buy back shares at a 5% to 10% dis­count to net as­set value.

‘Some­one who is eq­uity mar­ket risk averse shouldn’t in­vest in a VCT,’ says David Steven­son, fund man­ager at Amati. ‘The tax ben­e­fits would be out­weighed by the fact they can’t sleep soundly at night.’

Steven­son sug­gests other peo­ple not suited to VCTs are those who are un­der-in­vested in a pen­sion, don’t have a pen­sion at all, or are a non-tax­payer.

HOW DO YOU BUY THEM?

You should buy VCTs di­rect from the fund man­ager or a spe­cial­ist VCT bro­ker dur­ing the of­fer pe­ri­ods to get all the tax ben­e­fits.

You can buy VCTs on the open mar­ket (also known as the sec­ondary mar­ket) but you would lose the 30% in­come tax re­lief.

THE DIF­FER­ENT TYPES OF VCTS

There are three dif­fer­ent types of VCTs, each suit­able for dif­fer­ent types of in­vestors: Gen­er­al­ists, AIM VCTs and Lim­ited Life VCTs.

VCTs of­ten in­vest in early-stage busi­nesses where a ta­lented group of in­di­vid­u­als are try­ing to com­mer­cialise a bright idea

VCTs aren’t al­ways about in­vest­ing in the next big thing. Some­times they can in­clude stakes in busi­nesses grow­ing at a slower pace like gar­den cen­tres

Newspapers in English

Newspapers from UK

© PressReader. All rights reserved.