Investing in these involves more risk and the VCT system has been refined in recent years to ensure money is channelled towards that end of the company spectrum. So are VCTs worth it? We take a look and get some recommendations of venture capital trusts to consider.
VCTs are an extension of conventional investment trusts, pooling investors' cash and spreading it across a number of companies, they are traded like shares on the stock market. Venture capital trusts put investors cash to work backing potentially high growth early stage companies, which can either be unquoted or stock market listed on the Alternative Investment Market, AIM for short. The largest VCT, Octopus Titan, for example has previously backed property listing website Zoopla, and current holdings include holiday firm Secret Estates and online marketplace, Depop, which has been described as cross between eBay and Instagram.
But for all the successful names, there will be plenty that fall by the wayside. To offset the high risks associated with such small company investments, people are rewarded with generous tax breaks. You need to have paid at least as much tax as the rebate and must hold the investment for at least five years. It's also worth mentioning a VCT must continuously have at least 70 per cent of its investments in qualifying holdings 80 per cent for accounting periods beginning on or after 6 April The remaining 30 per cent can be invested in essentially any investment.
These are often stable investments like cash, listed equities and large company debt instruments. Every year, many VCT managers issue new shares for investor to buy. This is because the 30 per cent income tax carrot only applies shares bought when a VCT launches or raises new money - provided that they're held for a minimum of five years. So if you buy shares on the secondary market i. The shortfall in capacity of VCT will always pose a problem for many investors as a number of popular VCTs have always filled very quickly.
The VCT fundraising season has started earlier than previous years, which VCT providers say is due to the huge growth in demand for their products. VCTs shouldn't be confused with another tax-efficient investment mechanism called enterprise investment schemes.
The tax relief can be carried back to offset income tax liabilities in the previous year. However, you must hold the investment for a minimum of three years to qualify for the income tax relief. If the EIS business performs poorly and you lose money on your investment, you may also claim loss relief at the equivalent rate to the highest rate of income tax you pay.
So if you pay income tax at a rate of 45 per cent, you can claim up to 45 per cent of your net loss in income tax relief. Whereas VCT are listed and tend to offer regular dividends, EISs are much less liquid, and cash is usually held for a longer period until gains are realised. Firstly, an investor with a substantial capital gains tax liability - from the sale of an investment property for example - can defer payment of CGT if they reinvest the gain into EIS.
The liability does not disappear, but it becomes payable once you sell the EIS shares. The other reason is to mitigate inheritance tax liability. Hollands adds: 'However, there are many other ways to reduce an IHT liability, including giving assets away while you are alive and maximising pensions, so it is important to consider all your options before embarking on this route.
Under UK regulations, EIS schemes are treated as only suitable for sophisticated or certified high net worth investors and therefore they cannot be marketed to retail investors. VCT aren't cheap: They typically charge management fee of between 2 and 2. Given the research involved in searching out potential investments — and then monitoring them — venture capital trusts carry high initial and annual charges.
To put this into context, the average cost of an actively-managed funds - those where the holdings are cherry-picked by a fund manager to beat a specified stock market index - is 0. Whereas VCTs typically cost between 2 and 2. Selling trust shares can also prove difficult as a result of the thinness of the market — there are few buyers and sellers. We asked Hollands to pick the best VCT on market. Here are his selections. Octopus Titan is the largest VCT of all and its current offer is once again proving the most popular choice with investors.
The existing portfolio has around 70 qualifying investments including luxury online holiday club Secret Escapes, learning company Memrise, which has developed an app that makes learning a new language fun, and Depop, an online marketplace for fashion and lifestyle items that has 10 million users worldwide. The VCTs focus on making growth capital investments into unquoted companies with rapid growth potential and where there is a clear path to an eventual exit.
Examples of current holdings include Infinity Reliance, owner of e-commerce site My 1st Years which retails personalised items for babies and children including toys and clothing, and designer jewellery firm Monica Vinader whose accessories have been worn by the likes of Kate Winslet, Cameron Diaz and Keira Knightley. This is because historically these VCTs have invested in a blend of asset-backed investments, as well as higher growth companies.
Asset-backed investments, such as Radnor House, a private school near Sevenoaks, provide an element of security because of the property owned by the business. Of the newer, upcoming managers we also like Pembroke VCT, which is managed by Oakley Investment Management, part of the Oakley Capital, a private equity house founded by serial entrepreneur Peter Dubens. Pembroke focus on four areas of expertise: apparel and accessories, hospitality, media and technology and health and fitness.
Examples of existing investments include Five Guys, a casual dining chain focused on premium quality handmade burgers and fresh cut fries which has expanded to over 90 branches in the UK. These include Cambridge based Abcam, a supplier of protein testing kits to life scientists across the globe; high tech defence group Cohort and Anpario which supplied animal feed to the farming industry. Some links in this article may be affiliate links. If you click on them we may earn a small commission.
That helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence. The views expressed in the contents above are those of our users and do not necessarily reflect the views of MailOnline. How we can help Contact us. Individuals can benefit from a range of tax reliefs, and spread their investment risk, by subscribing for or buying shares in a VCT, which, in turn, subscribes for newly issued shares or debt in unquoted companies companies listed on AIM or PLUS markets other than the PLUS-listed market are unquoted for these purposes.
The VCT regime is prescriptive and sets out a number of requirements that must be met, including in relation to:. To discuss trialling these LexisPSL services please email customer service via our online form.
Free trials are only available to individuals based in the UK. We may terminate this trial at any time or decide not to give a trial, for any reason. Trial includes one question to LexisAsk during the length of the trial. To view the latest version of this document and thousands of others like it, sign-in to LexisPSL or register for a free trial. Existing user? Sign-in Take a free trial. This Practice Note discusses the common law doctrine of privity of contract; the equitable and statutory exceptions to it; how the doctrine affects enforcing a contract against a third party and what happens when, notwithstanding the lack of privity, a contract has an indirect effect on a third.
What is a third party debt order TPDO? Third party debt orders were previously known as 'garnishee' orders and operated under the regime provided for in CCR Ord 30 and RSC Ord 49 now revoked. Although the rules in CPR 72 are new, many of the principles with which they are concerned are well.
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