Published: Mar 14, 2014
Steve Marshall, Sales and Marketing Director
VCTs offer some of the most attractive tax incentives available to UK investors, for investing in the UK smaller business sector. Of course there is risk in smaller company investment, but a good VCT manager can materially mitigate the risk for investors, and VCTs are an increasingly common part of investment portfolios. So why do people invest?
Unique set of tax breaks
VCT investors with sufficient income tax liability can receive up to 30% income tax relief on an initial investment of up to £200,000 per tax year (providing that the shares are held for at least five years). In addition, all dividends are free of income tax, and any capital gain on disposal is exempt from capital gains tax.
The benefits of pooled investments
VCT investment allows investors to spreads the cost and risk of investing in a relatively specialist asset class (unquoted private companies), whilst allowing them to access a wider investment landscape.
Economic recovery / Dynamic businesses
There are encouraging signs of economic recovery in the UK, and successful smaller companies are usually dynamic and nimble enough to quickly identify and react to new market opportunities. With banks still cautious about lending, VCT managers are often able to provide the financial and strategic support to take ambitious businesses forward and provide attractive investor returns.
Low interest rate environment
Interest rates have remained at record lows since 2009. Income focused investors, and those seeking tax efficient options, are looking for reliable alternative sources of income. VCTs use tax-free dividends as the primary means of providing shareholder returns, from high quality portfolios of income generating private companies. Yields in excess of 5% are achievable based on the investment cost, often approaching 8% when the effect of 30% initial VCT tax relief is factored in.
Serious reduction in pension tax reliefs
The overall benefit of tax relief on contributions into pension schemes has been significantly reduced in recent years, and the maximum annual contributions and lifetime allowance are being further cut from April 2014. For higher rate tax-paying investors, VCTs offer an alternative and extremely tax-efficient investment savings vehicle – both pre and post retirement.
Tax efficient retirement income
VCTs allow investors to derive a regular and highly tax efficient income stream, as they can pay dividends from both income and capital. VCT income can then be used to supplement investment and/or retirement income - particularly in view of the relative flexibility of accessing the funds in comparison with annuities.
Attractive potential returns
VCTs offer the potential for very attractive and tax-free medium to long term returns from dynamic smaller companies, capable of paying a regular income to the VCT and of delivering significant capital appreciation on exit. These companies are not ordinarily accessible by retail investors and require specialist investment research and investment.
Specialist fund managers
A generalist VCT provides access to a wide range of good quality smaller companies. A proven and well-resourced VCT manager will be able to generate a consistent flow of good quality investments and be capable of carefully managing the risks inherent in smaller company investment.
A large and mature VCT will use asset and sector diversification to significantly dilute the risk for investors. An established VCT will typically invest in up to 40 holdings and, depending on the expertise and resource of the VCT manager, across a range of industry sectors and UK geographic regions.
Access to well researched alternative assets
VCTs invest predominantly in private equity, an asset class whose historic returns have often outperformed mainstream equity markets and assets classes, and the better performing VCTs have been able to achieve consistently good returns. This offers private investors the chance to invest at low cost for a financial stake in flourishing UK businesses and to share in the early growth potential.
And the risks?
This blog contains personal opinions and is intended only as an outline consideration of the reason investors might consider investment in VCTs. A prospective investor should consult an authorised financial adviser if they are in any doubt about the suitability or affordability of VCT investment, and should pay particular attention to the risk factors set out in each VCT prospectus or offer document. Investment in VCTs carries a higher risk than many other forms of investment. VCT shares, though listed, are likely to be difficult to realise because the underlying assets are predominantly unlisted companies which are not publicly traded. The value of shares in a private company, and the level of income derived from them, may fall as well as rise and investors may not get back the money originally invested. Please note that Maven Capital Partners UK LLP is acting solely for the VCTs, and cannot give any investment, legal or tax advice.