Three reasons to invest in VCTs ahead of the Budget
The Autumn Budget is now just a week away. Whether it's the excitement of playing along to 'buzzword bingo', guessing the colour of the Chancellor's tie, or you want to know whether filling up the car or going to the pub is going to cost you more... it’s one of the most highly-anticipated events of the year for anyone genuinely interested in their finances.
More often than not it can be a damp squib for investors. Having said that, occasionally a raft of changes is announced, which will have positive and negative implications for our financial futures.
Ahead of the Budget announcement on 22 November, there has been speculation that changes could lie ahead for Venture Capital Trusts (VCTs).
Investors in these vehicles currently benefit from a 30 per cent tax break if they hold the shares for more than five years. However, a paper published by HM Treasury in August expressed concerns that some VCTs are too focused on capital preservation, which is at odds with the UK government's aim to encourage new capital into higher-risk assets. As a result, there are rumours that this 30% tax break could be slashed to 20% or more. In light of this, a number of VCTs have been raising money ahead of the Budget.
Three reasons to invest in a VCT
VCTs are about funding companies during their early stages of growth, providing investors with the potential to be rewarded well over the long term. Any income or dividends that are paid from VCTs are free of income tax. In addition, any gains made within the VCT are free of capital gains tax. So that's a real advantage – especially when you consider that the dividend tax allowance could be cut in the Budget too.
Another point to consider is that VCTs invest across a range of asset classes, including AIM stocks and private equity, which can provide diversification within a broader portfolio.
Finally, the potential threat to this current tax relief may be a reason buy into VCTs now rather than later. They generally make sense for people in higher tax brackets, who have an appetite for taking on risk and a long-term outlook. It is worth remembering that you need to hold VCTs for a minimum of five years to retain the tax relief.
What are the risks of VCTs?
It is important to understand that VCTs carry higher risk than many other forms of investment. The value of an investment in a VCT may go down as well as up and investors may not get back the full amount invested, even after taking into account the tax reliefs.
VCTs usually trade at a discount to their net asset value. Furthermore, because it may be difficult to exit the investment, VCTs should be considered long-term investments. Tax reliefs are subject to change and the value of the tax reliefs will also depend on personal circumstances.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Chris's views are his own and do not constitute financial advice.