Venture Capital Trusts are a UK government approved tax-efficient investment, read a quick guide here.
Over the past twenty years successive governments have acted to encourage investment into UK industry with the introduction of various tax-efficient investment schemes. With these kinds of vehicles, investors are incentivised with generous tax reliefs to take on the additional risk that comes with backing smaller UK businesses.
Venture Capital Trusts were introduced in 1995 and endure today as a popular method of investing tax-efficiently, while also helping the domestic economy. VCTs are “close ended” investment schemes which are designed to provide private equity-style capital for fast-expanding companies. They could be thought of as a type of publicly-traded private equity investment, similar to business development companies in the US. In essence, VCTs allow investors to spread the risk associated with investing in smaller, unlisted businesses among several companies held within the trust structure.
How it works
VCTs offer generous tax reliefs, which make them a useful tax planning tool for investors in a whole range of scenarios. However, the rules around obtaining these tax reliefs can be quite complex and there are various strictures which the VCT provider – and the companies it invests in – must satisfy for the reliefs to be valid.
Furthermore, not all VCT firms are equal: some have an excellent long-term track record of generating good returns, while others are very much less appealing investment prospects.
It is essential that you use a reputable provider with a good track record. Happily, since VCTs have been popular investments among high net worth individuals for many years, your wealth manager is likely to have in-depth knowledge of the VCT providers and investments available to you. A brief summary of the tax advantages VCTs present is below, but you should consult your financial adviser to work out if these vehicles really are right for you.
Income Tax relief
(Details correct for the 2014/15 tax year.)
30% Income Tax relief is available on the amount you invest in VCT shares, provided you hold the shares for at least five years (it will be clawed back otherwise). You can set this relief against any income tax liability due, whether this is at the lower, basic or higher rate. You can put up to £200,000 into VCT investments each tax year.
Any dividends arising from the ordinary shares in a VCT (up to the £200,000 annual maximum) are exempt from Income Tax.
VCT shares are exempt from CGT on disposal, up to a limit of £200,000 each tax year.
Capital gains made within the vehicle are also exempt from CGT. You can receive these as dividends.
Risk and manager selection
VCTs and other tax-efficient investment schemes are tax-incentivised for a reason: they are higher-risk investments because the companies in question are typically small and young. Indeed, to qualify for VCT backing they can’t be listed on the main stock exchange. This means that for most investors, VCTs, Enterprise Investments Schemes and so on should only constitute a small part of their portfolio.
That said, these small companies can often enjoy strong growth; it is not unusual for a VCT vehicle to target upwards of 10% for their annualised return. There are some very sophisticated VCT providers in the market which have built a reputation for selecting well-diversified portfolios of underlying investments which are optimised to minimise risk and maximise returns. Indeed, several VCT firms lend the expertise of their own people to help businesses flourish. This is why you may want to select a provider which specialises in one of the sectors typically being invested in, like renewable energy.
Yet not all VCT providers have these kinds of credentials and you should be wary of any firms which don’t have a robust investment strategy and a strong pipeline of deals in place. A successful track record may not guarantee future performance, but it is a good indicator. A professional wealth manager will be able to guide you to the VCT investments with the best prospects. You may find carrying out this due diligence yourself a challenge since the VCT sector is far more opaque on performance than ETFs, for instance.
If you suspect you could be getting a better deal on price and performance from your existing wealth manager or IFA, get a second opinion. Simply complete our short online smart tool to start the process of upgrading to your best-matched wealth manager today.