Analysis: Venture Capital Trusts (VCT)

Gordon Leslie, Independent Financial Adviser, discusses Venture Capital Trusts

What is a VCT?

A VCT is a company whose shares trade on the London Stock Market and aims to make money by investing in other companies. These are normally very small firms which are looking for further investment to help develop their business. VCT rules state a maximum company value of £15 million and a maximum of 250 employees. VCTs often invest in companies at an early stage of development so could be deemed higher risk. VCTs are therefore aimed at sophisticated investors who can afford to take a long term view and accept falls in the value of their investment.

Tax benefits

The Government offers up to 30% income tax relief for monies into a new VCT., e.g. if you invest £20,000 you could receive either a cheque from the tax man for £6,000 or an adjustment in the tax that you pay.

Anyone can invest but note this is a tax rebate, so it is restricted to the amount of income tax you pay. You can invest up to £200,000 each tax year but if you have only paid £5,000 in income tax you would only receive a £5,000 tax rebate. You must also hold onto the share for 5 years to permanently keep the tax rebate.

This rebate is only available when you invest in a new issue of shares in a VCT or a top up, not on any VCTs you buy on the open market. However, it is worth noting that if you do buy VCTs on the secondary market these count towards the £200,000 allowance for the tax year in which you buy them, despite the fact you don’t get the income tax break.

Please note that the availability of tax relief depends on the companies invested in maintaining their qualifying status.

Risks involved

Investors should be aware that in general they are being exposed to a higher risk than mainstream equities, and therefore should be for experienced investors who have an understanding of the nature and complexities of the product, and can afford to take the risk. A long term investment view is also essential with VCTs.

How to choose a VCT

There are several different types of VCT. The most common (and the most popular with investors) are Generalist VCTs. These are relatively broad based, usually investing in a range of unquoted companies in a wide variety of sectors and often in various stages of development. Limited Life VCTs are designed to be lower risk and lower return than other VCTs and aim to wind up and distribute assets to shareholders after 5-7 years – though there is no guarantee they can meet their objectives and if the manager finds the underlying investments difficult to sell this could extend the life of the investment.

AIM VCTs, as the name implies, primarily invest in companies listed on the Alternative Investment Market (AIM), the junior market of the London Stock Exchange. These shares are usually readily tradable, so the underlying portfolio is more akin to a smaller companies unit trust, albeit with the restrictions imposed by the VCT rules. Finally, Specialist VCTs invest in one sector or area such as healthcare or infrastructure.

Conclusion

It is worth noting that the value of your investments can go down as well as up, therefore you could get back less than you invested. Seek professional advice before taking first steps into Venture Capital Trusts.

Gordon Leslie, Independent Financial Adviser