VCTs - Should you be considering them?
Written on 18/09/2019

What is a VCT I hear some of you ask? 

Well before I launch into one of my pithy articles explaining why I think they might be useful for your clients, allow me to explain what they are and how they work…. 

The Venture Capital Trust (VCT) is a listed company, run by a fund manager, investing into smaller companies not quoted on any stock exchange, easy enough so far. 

VCTs invest into small, non-quoted companies according to strict rules form HMRC, following these rules allows them to qualify as VCTs and VCTs have some nice tax advantages. 

To meet the HMRC rules a potential VCT must: 

  • Be listed on a recognised stock exchange, typically the London Stock Exchange (EU directive 2004/39/EC explains more)
  • The income must be derived wholly or mainly from shares or securities
  • Not retain more than 15% of income derived from shares or securities
  • No company it invests in may represent more than 15% of the total VCT value
  • 70% of the total investment must be held in qualifying share or securities holdings
  • 70% of the qualifying holdings must be in eligible shares
  • It cannot invest in non-qualifying shares
  • It cannot invest in such a way as to breach any investment limits
  • It cannot invest into any company that breaches the HMRC maximum age limits
  • It cannot invest into any company that breaches the business acquisitions prohibitions 

Basically a VCT must invest according to strict rules to qualify as one (as I said before the rather dry list above!) 

There are some key guides to VCTs too, in essence there must be objectives to grow and develop in the underlying investment companies and there has to be a significant risk of capital loss present. (scary right?) 

VCTs are used to channel investment into small, growing companies and to allow them access to capital, often denied to them as a result of their size. The secret is in the first word of the name, Venture….think Venture Capitalist and the aim is largely the same. 

So that is what they are set up and used for, to provide a source of capital for new, growing and smaller companies, to help them grow and flourish. 

But where then do you and your clients come in? It all sounds rather good but what’s in it for you guys? 

Let me paint a hypothetical picture for you and I stress, this is a scenario that I have come up with, it does not relate to any client I know, living or dead (and I don’t mean zombies there!) 

Your client holds a large ISA portfolio or it could be shares or stock options at work or OEICs or Unit Trusts or Investment Trusts (you see where I am going here) and they are a balanced investor or have a higher ATR. 

They may want capital growth or income or both but they certainly don’t want capital preservation. 

They can afford to take risk with their money and also can afford to lose a certain amount in the short to medium term, sound familiar so far? 

So what is in it for the investor? Why not just out your money into a bond or OEICs or UT portfolio? Why not an ISA? 

Here’s the reason why they are worth looking at….. 

Tax Refund (not tax relief) but a refund. 

Let’s say that you invest £100,000 into a VCT, guess what you get? 

A 30% Income Tax refund. That’s £30,000 back and £100,000 invested. (maximum investment £200,000 to get a tax refund per tax year) 

You also get tax free dividends and can have your money returned but you have to hold the VCT for five years. 

If you sell VCT shares you also do not pay Capital Gains Tax on the sale. 

Now there are some risks of course, a VCT invests in small, higher risks companies and if you take out your money before 5 years you may lose some of the tax benefits. 

But let us look at this realistically…… 

You can only receive a maximum of £16,000 income tax relief in a pension investment per year (as the annual allowance is capped at £40,00)

ISAs receive no tax relief 

So in theory you can get £60,000 tax refund every tax year (assuming you have £200,000 to invest of course) and that is higher than a pension plan benefit. 

You can withdraw your investment after 5 years. 

You can receive tax free dividends every year. 

You need no income to support the contribution. 

Charges are higher than many other solutions and the investment risk is potentially higher than some other solutions, the market for VCTs while growing year on year is still younger than pensions or ISAs. 

But for a higher risk investor with a high capacity for loss this can offer a very attractive investment opportunity. 

Think of it another way 30% guaranteed return in a day for your investment!

Surely this is something that you should be at least considering.....?

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