Investments in venture capital trusts qualify for 30 per cent income tax relief, subject to a maximum of £60,000 per investor and a five-year minimum holding period.
Investors only receive up to 30 per cent income tax relief on any investment up to £200,000, provided that the relief does not exceed their total income tax liability for that year.
So an investment of £20,000 would give investors £6,000 back upfront, either through their tax return or by changing their PAYE code.
However, if they decide to sell within five years, the upfront income tax relief will be withdrawn and any income tax relief already claimed will have to be repaid.
Furthermore, all dividends received are free of income tax and there is also no capital gains tax to pay when the VCT investment is sold.
There are several investment criteria that underlying companies must meet in order to be VCT qualifying, including, but not limited to:
• companies must be unquoted or Aim-listed;
• the maximum value of a company’s gross assets (before VCT investment) is £15m; and
• the company currently cannot have more than 250 employees (before VCT investment) – this will increase post-Royal assent to 500 for ‘knowledge intensive companies.’
At least 70 per cent of a VCTs total assets must be invested in qualifying companies within three years and this ratio must subsequently be maintained at all times. The remaining 30 per cent of the VCTs assets can be invested in non-qualifying investments such as cash, listed equities, debt and investment funds.
In terms of the make-up of products the VCT market is now an established and mature one that has directed billions of pounds into smaller companies over the last 20 years.
There is a broad variety of VCTs on the market for investors depending on their planning objectives. Generalist VCTs primarily invest in the equity of the investee companies, with a view to growing the business over time and then exiting via trade sale or initial public offering. These companies can be unquoted or listed on Aim.
Hugh Rogers, business development director at Puma Investments, says this type of VCT offers investors a high potential for capital growth if the manager backs a successful company, but this is also counterbalanced by losses on businesses which don’t do so well.
Specialist VCTs are similar to generalist VCTs, but focus their investment on companies operating in a specific sector. Past examples include VCTs that focus on businesses operating within the media, biotech and renewable sectors.
Concentrating on a single sector can involve more investment risk but could also offer higher returns if the chosen sector does particularly well, according to Paul Latham, managing director at Octopus Investments.
For those seeking a more diversified portfolio then Mr Latham says a generalist VCT is usually the preferred option.
In the market at the moment Mr Latham notes specialist VCTs are uncommon.
Limited-life VCTs are launched with the intention that they will be wound up at the end of the minimum five-year holding period, subject to shareholder approval at the time, and all proceeds are distributed to shareholders.
Mr Latham warns the problem here is that in many cases it may be difficult to find a buyer for the investments owned by the VCT, and it is therefore likely that the proceeds will be less than the net asset value of the VCT had it continued to operate.
Limited-life VCTs contrast to ‘evergreen’ VCTs, which are set up to last indefinitely with the aim of providing long-term returns to investors.
Mr Latham says: “Some VCTs specialise in finding investment opportunities in small, unlisted businesses in the early stages of their development.
“While these businesses can offer the potential for high returns, they do have a higher failure rate than more established businesses and so should only be considered by those comfortable with the risks associated with smaller company investing.
“Investors wishing to access this part of the spectrum will often choose a VCT with a large diversified portfolio of existing investments with the aim of spreading the overall investment risk.”
Aim VCTs invest in more mature companies that are already big enough to be trading on the Alternative Investment Market, the junior market for the London Stock Exchange.
Aim VCTs enable access to this market via an attractive tax efficient investment vehicle, but Mr Latham notes these will often be affected by market fluctuations outside of their control.
Mr Latham says despite the different types ultimately it is important to understand that all VCTs should be considered high risk investments as smaller companies can be more volatile and harder to sell than larger companies listed on the main market.
