Venture Capital trusts (VCTs) and, more recently, enterprise investment schemes (EISs) are gaining traction as solid investment options for wealthier clients who find themselves frustrated by the introduction of lifetime and annual pensions caps. Business in the VCT space has never been so popular, and what used to be seen simply as a helpful way to take advantage of a tax shelter, is now embraced as a good idea in its own right.
Riskier investments but with potentially huge capacity for big returns, these are for investors with a higher-than-average net worth and an ability to absorb potential loss. Fundamentally, the vehicles are ways to stimulate the economy and encourage investment in small or new businesses, with the additional benefits of the tax shelter.
VCTs
The VCT scheme has been running since April 1995 and was originally intended for individuals who wanted to indirectly invest in a variety of small, higher-risk companies whose shares were not listed on a recognised stock exchange. VCTs typically invest in unquoted shares including new shares of privately owned companies and new shares of companies traded on the Alternative Investment Market (Aim).
One of the principal attractive qualities about VCTs is the tax relief that comes with them. Subscriptions to shares in a VCT means an investor can get income tax relief of 30 per cent, so an investment of £1,000 would cost only £700. In addition, there is no income tax on the dividends from VCT shares and no capital gains tax (CGT) on the growth.
There is naturally a downside. Here, it is the element of risk. The reason such significant tax benefits exist with VCTs is that their very purpose is to encourage and stimulate investment in smaller businesses that are not generating a great enough cash flow to be able to access loans or other, more traditional, sources of finance. These businesses generally need more capital than most single investors could afford.
Because of the speculative and high-risk nature of VCTs, they are more likely to be suitable for sophisticated investors than many mainstream clients who might need access to their money in the near future, or those who are less able to tolerate loss of capital.
