Elsewhere, some clients who own rental properties and want to invest for the future have turned to VCTs. Until 2017, buy-to-let landlords could deduct their mortgage interest from their rental income and only pay tax on the net income. Today, landlords can now only receive a tax credit equivalent to the basic rate of tax. Higher or additional-rate taxpayers won't get all the tax back on mortgage interest payments. VCTs offer landlords a way to invest their rental income tax-efficiently. This is especially powerful because entitlement to make pension contributions requires ‘relevant earnings’, typically from employment, that many landlords will not have.
3. Now is an exciting time for venture capital
Many clients have experienced increased propensity to invest during the pandemic, when disruption has created opportunities and new markets for early-stage companies to address. Naturally, there’s been a huge amount of interest from investors in smaller company investing.
Through investment managers, VCTs provide access to companies that retail investors wouldn’t otherwise have access to. As they typically invest in smaller companies, either unquoted or not listed on a main market, which are early in their journey, there’s significant opportunity for growth. Whilst these companies carry a higher risk profile and many fail, they can be flexible and adapt quickly to shocks, such as a global pandemic. Compared to larger companies, they can have the ability to turn the ship quicker and exploit new opportunities.
VCTs can also provide diversification within a client’s portfolio. Not only do they back a range of types of companies across different sectors, but they also provide access to companies at various levels of maturity - some older companies may have been held in the VCT for a number of years, and some will naturally be very early stage.
Unquoted companies are also less likely to be affected by market sentiment, as their shares aren’t traded on a main stock exchange. Instead, their share prices are calculated periodically, based on the underlying performance of the business rather than the emotions of the herd. We’re certainly seeing some interesting opportunities for these kinds of companies.
Bear in mind the risks
It is important that any client understands the risks before they decide to invest. The value of a VCT investment, and any income from it, can fall as well as rise, and investors may not get back the full amount they invest. Due to the nature of smaller company investing, VCT shares may be volatile. They may also be hard to sell.