Happy birthday Venture Capital Trusts!
Venture Capital Trusts (VCTs) are a long-running government initiative designed to encourage individuals to invest in small, unquoted but potentially high-growth businesses by providing various tax breaks. To this end VCTs play an important role in filling the funding gap left by banks, who are unwilling to lend to small companies. As a reminder, here are the current tax benefits of VCTs for subscriptions of up to £200,000 per tax year (tax benefits are dependant on individual circumstances and subject to statutory change):
TAX BENEFITS OF VENTURE CAPITAL TRUSTS
- Initial income tax relief of 30% if held for five years (early exit will require repayment of the tax rebate)
- Tax-free dividends
- Capital gains tax exemption on sale of VCT shares
To reduce the individual company risk, the VCT manager will construct a portfolio of typically 30-40 of such companies and dividends are paid when the portfolio companies mature and are sold to an outside party. It may surprise you that several VCTs pay out a solid level of income on a regular basis, and some of those are offering shares in what are called “top-up” offers. These give new investors the opportunity to invest into mature portfolios which may have the potential for dividends from the outset.
While the tax breaks associated with VCTs are attractive to any investor, one area where Chelsea has seen increased demand is in retirement planning. For clients who have reached their annual or lifetime pension allowance, VCTs could provide a tax-efficient way to invest for the future. This is because VCTs are a tax wrapper that can reduce income tax.
So, with all of that in mind, happy 20th birthday VCTs! And if you're wondering which VCTs have been around longest, it's Baronsmead VCT and Northern Venture Trust. £1,000 invested at the launch in each trust (not including any tax breaks) would have grown to £3,549 and £4,031 respectively in share price total return terms*. Their investors certainly have something to celebrate!
(Data: Baronsmead VCT from 13/11/1995 to 31/01/2015, Northern Venture Trust from 01/11/1995 to 31/01/2015. Source: AIC using Morningstar, net income reinvested. Figures exclude charges).
Baronsmead and Northern remain well regarded but are sadly not currently fund raising. However, other top-performing VCTs, such as ProVen Growth and Income (best performing VCT over ten years*) and British Smaller Companies, remain open. Act now to avoid disappointment!
VCTs should be regarded as long-term investments and are only suitable for sophisticated investors. The FCA suggests a sophisticated investor is somebody with an annual income of £100,000 or investable assets of more than £250,000. They usually invest in small, unquoted companies and therefore carry a greater risk than many other forms of investment. The levels of charges are often greater than unit trusts and OEICs and they can be harder to sell than more mainstream investments.
To see the offers currently open and their discounts please visit our website at: www.chelseafs.co.uk/products/vct/offer
*As at 30th Sept 2014
Important Notice:
Please be aware that VCTs are long-term investments. They usually invest in small, unquoted companies and therefore carry a greater risk than many other forms of investment. The level of charges are often greater than units trust and OEICs and they can be harder to sell than more mainstream investments. Past performance is not necessarily a guide to the future. The value of investments, and the income from them, can fall as well as rise, due to market and currency fluctuations and you may not get back the amount originally invested. All our featured products should be regarded as medium to long-term investments. Chelsea Financial Services offers an execution-only service. If you require investment advice you should contact an expert adviser. Tax assumptions are subject to statutory change and the value of tax relief (if any) will depend upon your individual circumstances.