This article is part of Morningstar's Guide to Alternative Investing; providing everything you need to know about property, commodities, infrastructure and other diversifying assets.
Venture Capital Trusts are listed funds, invested start-ups and fledgling companies. The nature of their holdings make them risky, but in return for taking on risk, and locking their money away for a period of time, investors can be rewarded with tax breaks and high returns.
Only experienced investors with well diversified portfolios should invest in VCTs – and allocate a minor portion of their investable wealth in these products. It is recommended that investors looking to invest tax efficiently first maximise their annual ISA and SIPP allowances.
What is a VCT?
Over the last couple of years there have been some adjustments to VCTs, reducing the size of the companies that managers can invest in, and the types of deals they can fund.
As of April 2014, VCT managers can invest in companies that have assets worth £15 million or less, where currently the investment threshold was £7 million or less. In order to spread the risk, a VCT will provide capital to several companies; softening the blow to the investors should one holding go under. The VCT manager is not allowed to allocate more than 15% of the entire portfolio to one company.
This year, further restrictions were introduced meaning VCTs can no longer invest in management buy-outs, a transaction where a company’s management team purchases the assets and operations of the business they manage.
In order to compensate the investor for the risk of investing in unquoted assets, VCTs offer 30% income tax relief for the year they invest, and the capital growth is also tax free; any dividends payable are also tax-free.
You have to be invested for five years to qualify for the tax breaks, but as VCTs are listed vehicles you can sell your shares before maturity should you wish. Minimum investment is typically £5,000 with a maximum allowance of £200,000 per year. Investors must be aged 18 or older.
Unlike investing in a smaller companies fund, where share price growth makes up the majority of the return, VCTs mostly reward investors with tax-free dividends.
“These sophisticated investments are generally suitable for those with an annual income in excess of £100,000 or investable assets of more than £250,000,” said Richard Troue of stock broker Hargreaves Lansdown.
“The hands-on nature of VCT investing also means higher costs. In any circumstances VCTs should not exceed 10% of a portfolio.”
Investors who want to support small business but are uncomfortable taking on high levels of risk may wish to consider a smaller companies investment trust instead.
