Venture Capital Trusts (VCTs) are continuing to sell well this year, with one selling out within 24 hours, according to last Saturday's Times. The total raised by VCTs in 2016 was £169.5m, well up from the £110.8m in 2015.
VCTs offer an exciting but risky, investment opportunity. VCT managers aim to make money by taking stakes in small (mainly unquoted) businesses, helping them develop and eventually selling them on for a profit – usually five to ten years later.
Obviously, investing in smaller and early stage businesses is substantially higher risk, so whilst some investments can and do produce excellent returns, others will fail. So VCTs are really only for wealthier investors who can afford to take a long-term view and accept falls in the value of their overall investments.
The big appeal of VCTs is the tax breaks. To help compensate for the risks and to encourage investment into start-up firms, the government offers tax breaks for longer term investors. There is a 30% income tax credit on investments up to £200,000 each year when you buy new shares in a VCT. Further, there is no income tax to pay on the dividends and no capital gains tax when you sell your shares, which need to be held for a minimum of five years.
Bear in mind though that as it is a tax rebate, it is obviously restricted to the amount of income tax you have paid. So if you invest £100,000 but have only paid £10,000 in income tax, you would only receive a £10,000 tax rebate.
On top of the tax incentives, the tax-free dividends have strong appeal. Yields of 5%-7% are usual and look very attractive in this low interest rate environment.
VCTs therefore offer the opportunity to get in on the ground of new, exciting companies that have the potential to grow very fast. However, the risk of failure is also greater, so VCTs are much higher risk than most investments and are not for the faint-hearted. VCT shares can also be difficult to buy and sell – the market price may not reflect the value of the underlying investments.
So more than most investments, the usual investment health warnings – ie that prices can go down as well as up, that income is not guaranteed and you could get back less than you invest – are apposite. There is always also the risk that the tax breaks may be changed in a future budget.
None of this has deterred the record number of brave investors last year who are looking to reduce the amount of tax they pay, generate income and diversify their large portfolios.
In our view, VCTs should not be entered into without professional advice, which can help you assess the suitability of VCTs for your portfolio, objectives and circumstances.
For financial advice on VCTs or other investment matters, contact Kellands.