UK resident private investors, aged 18 and over, with a high risk profile and a long time horizon should consider a VCT, according to Jemma Jackson, PR manager of the Association of Investment Companies.
“VCTs can be useful from a tax planning perspective - but you shouldn’t invest in a VCT simply for the tax benefits.
“VCTs should be a long-term investment, and in order to receive the income tax relief when bought at launch, [they] need to be held for a minimum of five years.”
From his own experience, Michael Piddock, business line manager for VCTs at Octopus Investments, says he found many investors were still working but nearing retirement, and with their children packed off to university they are looking to invest their money to supplement their pensions.
“Traditionally our typical VCT investor is around 55 and in the ‘well-off’ bracket rather than just the ‘high net worth’ category.
“We are seeing this age profile shifting downwards, as younger investors are recognising that the tax benefits of pensions are being eroded by changes in the tax rules, and VCTs offer a useful alternative.
“The majority of our investors use a financial adviser, which is sensible for most people because VCTs are not for everyone and should be considered in the context of a whole portfolio.”
While investors need to hold VCTs for five years to retain the tax benefits, Mr Piddock said they should not assume that is the point at which they should exit the product.
Mr Piddock said while some VCTs have specifically been designed to offer liquidity after five years, increasingly low discount rates on share buybacks mean this liquidity is created by other means, at any time that suits the investor.
“Investors should really be looking at VCTs as something to be held for the long term – if VCTs are successful the tax-free dividends they produce should keep on going and provide a valuable income stream in perpetuity.”
