Funds that give 30pc of your tax back

The Daily Telegraph - Your Money - - FRONT PAGE -

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

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