Who would find a VCT useful?
Higher rate taxpayers who are prepared to diversify their portfolios into a tax-free environment with a spread of risk.
Those who want higher and rising tax free income from their investments.
Those who are prepared to accept a higher than average risk compared to other collective investments in return for potentially higher rewards after tax.
Those wishing to invest money from maturing Enterprise Investment Schemes (EISs).
Those looking to accelerate their pension funding.
Suitable for those investors who have already used up their ISA allowances or are investing the maximum allowed in their pension plans.
For pensioners, in particular, who are higher rate taxpayers, these investments are a good way of increasing their tax-free income.
What should I consider when choosing a VCT?
It is often advisable to invest in more than one VCT in order to spread risk.
Always consult a financial adviser if unsure of where to invest.
The experience of the manager in investing in smaller companies is very important.
Be aware that some VCTs invest in a greater number of new ventures, and these have much higher risks than VCTs investing in more established companies.
Consider the charges and compare with other VCTs. Accept that at this intensity of investment effort, you will be sharing any gains with your VCT manager/s.
The larger trusts will offer a wider spread of investments, but some smaller trusts can provide a more focused approach.
Consider what you want out of the investment. E.g. those with maximum tax free capital gains potential or maximum tax free income distributions.
Decide how much risk you want to take. All VCTs have some risk attached but the net potential returns are likely to be better than investing in most individual shares.
What if I have already invested the maximum allowance in my ISA?
If you have invested the full £7,200 tax allowance you can gain tax benefits on the full £200,000 allowance into a VCT.
What are the risks?
As with any stock market investment there must be some risk attached, but a number of factors significantly reduce this.
There are Stock Exchange restrictions, which means that only companies with good credentials are able to enter the VCT market.
The prospectuses of all VCT companies have to be approved by the Stock Exchange, which means that any claim they make will be carefully investigated.
Because Government regulation caps the size of company that may receive VCT funding, trusts' investments into smaller, unquoted enterprises will be greater than into the limited number of listed candidates. To diversify risk, investors could consider spreading their investments across a number of VCT companies.
Because tax reliefs are available and dividends and capital gains are tax free, the risk to your net investment is reduced.
Risk is further reduced as up to 30% of the gross investment can be invested in gilts and most VCTs invest in a variety of up and coming companies.
Who is eligible?
Any UK taxpayer over the age of 18 is eligible for the tax breaks.
The initial tax relief is limited to the amount of tax the individual pays.
Non-residents, apart from US persons or residents of Canada, are allowed to invest.
When can I sell?
VCT shares can be sold or bought at any time, but initial income tax relief is only available on the new issue of shares and even then must be kept for five years to retain the relief. Secondary purchases of shares, created from existing shareholders exiting, lose their right to initial income tax relief. These investors can still enjoy tax-free dividends and capital gains.
VCT shares must be companies quoted on the London Stock Exchange so that when investors wish to sell they can do so. It should be noted, though, that the secondary market in VCT shares is very limited, and investors can expect to dispose of their holdings on the open market only at a, sometimes substantial, discount to the underlying net asset value.
For this reason, many VCTs have a policy of buying back their own shares so as to control the extent to which their shares are discounted. However, the operation depends on the VCT having generated sufficient liquid returns from its investments, and even then may be suspended to protect its resources in adverse conditions.
How do I invest and receive the tax breaks?
It is always advisable to consult a financial adviser who will complete all transactions on your behalf.
It is also possible to go through a stockbroker.
If you feel you know enough about investing you can invest into a VCT directly.
When you buy a new issue, you receive the shares, plus a Certificate of Entitlement, and a form which you send to H.M. Revenue & Customs.
Those investors paying tax under PAYE can choose to have their tax code adjusted immediately and so pay less tax or can apply for an immediate tax repayment at the end of the tax year.
If the investor dies then income tax is not reclaimed, even within the first five years.