VCTs maximise tax-free allowances

With 5 April now less than a month away, private investors will be looking for ways to maximise their tax-free allowances.

Many will do this through stocks and shares ISAs and by making additional voluntary pension contributions.

Investors could also consider venture capital trusts (VCTs), which have the additional advantage of providing crucial funding to smaller UK businesses.

Aside from the 30 per cent income tax relief on initial investments (assuming the VCT is held for five years), investors stand to gain from tax-free income from dividends and tax-free capital gains.

These reliefs recognise the additional risks associated with the sector and the role VCTs play in supporting new and growing small businesses in the UK.

In terms of performance, over the year ending 31 January 2011 the average VCT has returned four per cent to investors.

Generalist VCT funds match this gain, whilst the technology VCT sector returned an average of nine per cent and the VCT AIM sector averaged a gain of 12 per cent over the year.

Over the longer-term, performance has been more mixed.

These figures do not take into account tax relief, which has an important positive impact on investors’ returns. A continued appetite from investors for VCT funds is providing good fundraising opportunities, with one VCT manager undertaking their largest top-up issue in four years.

However, this demand means that investors should be aware that higher profile, more established funds may meet their targets and close their offers early.

One VCT manager has warned that, with this in mind, those keen to invest may wish to consider the available options before the end of the tax year draws too near.

The VCT sector is fulfilling a strong demand for funding from small businesses. One VCT provider has in the last few months completed four deals, with a collective value of £12m.

Research published by the Association of Investment Companies (AIC) last month confirms that VCTs have an important role to play in providing development capital and speeding economic recovery.

The figures make a case for relaxing new EU restrictions, which at present limit the scope of new VCTs. The AIC’s research showed that, over the last decade, 37 per cent of VCT-backed companies would have been denied funding had these limits been in place.

Investments from VCTs can be a useful addition to a well-balanced portfolio as well as a much needed source of backing for SMEs. As always, it is important to research a company before investing and, if necessary, take financial advice.

In particular, VCTs can be more risky and should not be invested in simply for the tax reliefs they offer.

The AIC produces a factsheet on VCTs and has a wide supply of data available on all member VCTs, available on our website.

*Performance figures are mid-market share price with net income reinvested and a 3.5 per cent deduction for charges, stamp duty and market spread.

Jemma Jackson is PR manager for the Association of Investment Companies. The views expressed here are her own.