Article posted: 9 January 2013
We may just have started 2013, but one aspect of tax year end planning is already well underway.
Venture capital trusts (VCTs) have three important tax benefits.
- Investment in newly issued shares will normally qualify for income tax relief at 30%.
- Dividends paid by VCTs are generally free of personal tax (although dividend tax credits cannot be reclaimed).
- Capital gains, both within VCTs and realised by investors, are generally free of UK tax.
Such tax generosity is not given lightly: VCTs are high-risk investments, focused on small unlisted companies. They may not suit your investment risk profile and, even if they do, VCTs should form only a small part of your overall portfolio.
Around the turn of the calendar year, the first crop of VCT offerings starts to appear. The VCT promoters all want to be at the front of the queue, so that they are not left scrabbling for investors’ funds in late March. One of the most successful VCT managers had three of its five trusts on offer fully subscribed before Christmas.
Many of the issues now on offer, or due to arrive soon, are top-ups to existing trusts. This can mean that you buy in to a ready-made portfolio, depending upon the structure of the offering. It also helps to avoid the risk of choosing a new VCT that has limited success in raising funds and either returns your money just as the tax year ends, or starts life with disproportionately high fixed costs.
In 2011/12, 76 VCTs sought to raise funds according to HMRC, a number that has changed little in recent years. Picking the wheat from the chaff among all the prospectuses is no easy matter. If you think VCTs might suit you, taking advice should be your starting point.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances. The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Services Authority does not regulate tax advice.