Funds that give 30pc of your tax back
These trusts offer great tax perks – but you may need to act before the Budget. By James Connington
The generous tax perks enjoyed by venture capital trusts could be a casualty of the Government’s current review of long-term funding for early-stage businesses – and changes may come as soon as next month’s Budget.
As a result, many VCTs have brought forward their annual fund raising, which would normally take place closer to the end of the tax year.
VCTs are investment trusts that invest in early-stage firms that are either unquoted or listed on the junior Aim index. Such fledgling businesses have more scope to grow quickly, but are also more likely to go bust.
Currently, investments in VCTs at flotation attract 30pc income tax relief, as long as the shares are held for five years. There is a £200,000 annual cap on the amount that can be invested and still qualify for tax relief.
VCTs can also be bought on the stock market like any other quoted share, although there is no income tax relief when bought this way. There is no tax to pay on dividends and no capital gains tax when shares are sold, whether the VCT is bought at flotation or later on the stock market.
But the tax perks are viewed by many as a benefit for wealthier investors, leading to fears of a possible crackdown.
Jason Hollands of Tilney Bestinvest, the fund shop, said: “An incredible 25 VCTs are seeking new cash at the moment. This has been fuelled by firms seeking to raise funds now in case there are any curve balls in the Budget.”
He said he expected some of the top-quality offers to be fullylly subscribed by mid-November. r.
Below we look at five of thee best VCTs on offer now. There are three broad types: generalist, Aim and limited life, plus some specialistlist funds that choose to focus on a particular sector.
Limited life VCTs, which aimm to wind up after the minimum fiveyear period for tax relief, have e not been included, as rule changes have limited what they can invest in.
Annual VCT charges are typically 2pc to 3.5pc.
Northern VCTs is a group of trusts currently running aiming to raise £20m each for three funds.
The firm has been a top performer. According to Alex Davies of Wealth Club, an “execution-only” platform for VCTs and similar vehicles, £10,000 invested in Northern Venture Trust 10 years ago would have grown to £26,700 with dividends reinvested.
Northern has 37 unquoted holdings at present, with a mixture of more mature businesses and younger growth opportunities.
This venture c capital trust is the largest of the A Aim-focused trusts. It has 90 holding holdings, a large number for a VCT, and has returned 222pc over the past 10 yea years, according to data service FE. Mr Davies sa said Aim VCTs, despite investing in later-stage businesses, could b be hit harder by market down downturns. This is because thei their holdings are quoted and therefore subject to market forces and potential over-reactions.
Mobeus, another group of VCTs, invests in a mixture of newer and more mature businesses. Anyone who invested across all four of its VCTs in 2010-11 would have received £7,983 in dividends so far on an investment worth £10,000 (£7,000 after the 30pc tax relief).
Octopus Titan, the largest VCT, targets very early-stage businesses, often investing before they have become profitable. It has backed high-profile companies including Zoopla, the property website and eve Sleep, the online mattress seller.
It delivered a 67pc total return between April 2012 and April 2017. A huge dividend that led to a 33.8pc total return in the year to April 2017 accounted for a significant chunk of that figure.
This kind of lumpy performance is typical of VCTs, as tax-free dividends after the sale of a stake in a business form the bulk of returns. A number of sales in a single year can lead to huge one-off dividends. Baronsmead’s pair of VCTs contain a mixture of unquoted and Aim-listed companies. According to Wealth Club, they each hold around 20 unquoted businesses and 50 quoted investments. Top holdings include Crew Clothing and Netcall, a customer service firm. Baronsmead Venture Trust has returned 209pc over 15 years.
When you invest in VCTs there are certain nuances to be aware of.
First, if you choose to reinvest VCT dividends, the trust will create new shares for you to do so. This counts as a new share issue and so qualifies for the 30pc tax relief. However, they will also need to be held for five years.
If you want to sell your holding, don’t head to your broker’s website. Mr Davies said that if you called your broker it would often be able to arrange for the VCT itself to buy back your shares, often at a better price.
The rules about which companies VCTs can invest in are complex. Mr Hollands said company eligibility depended on assets, age, number of staff and use of funds. Property, power generation, farming and some other areas are not eligible for inclusion.
VCTs have backed high-profile firms such as Zoopla, which once sponsored West Brom; the sector could face reform by the Chancellor, Philip Hammond, below, next month