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MoneyTalk |
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by Arch Financial Planning Limited |
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VENTURE CAPITAL TRUSTS |
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During the next five months you will see an increasing amount of coverage in the financial press about a little understood investment product, Venture Capital Trusts (VCTs). The reason is simply that Gordon Brown gave a dramatic boost to the product in his 2004 Budget by offering 40% tax relief to investors for two tax years which ends on 5 April 2006. |
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VCTs are an investment in small to medium sized unquoted trading companies in the UK. In the last tax year £500m was invested and up to a further £700m is expected to be invested in this tax year.
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A Hot Topic |
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October 2005 |
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Current VCT Offers |
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Our website contains details of currently available VCT offers. This part of our website is updated every week with the latest information. Present offers include: Baronsmead 3 VCT (ISIS Equity Partners is one of the largest and most successful private equity teams) Eclipse VCT 3 & 4 (Structured as twin VCTs and has so far raised £8.3m in less than two months) Matrix Income & Growth 3 VCT (Particularly structured to provide a good income stream) Pennine AIM 6 VCT (Option of a 30% cash return after 3 years and Inheritance Tax features)
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VCTs are very high risk investments and you have to be prepared to leave your investment ‘to cook’ for a good number of years. However, their tax efficiency and the potential rewards are substantial. As well as the 40% tax relief, investors enjoy tax free growth and tax free dividends. |
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The Risks are High |
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There are not many investments where when you have invested £10,000, the Revenue gives you £4,000 in tax relief, making a net cost of just £6,000 |
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VCTs were introduced on 6 April 1995. The intention was to encourage investment in small companies which were finding it difficult to raise relatively small amounts of funds of up to £1m. Venture capital companies tend to find much larger deals more rewarding. In fact the UK venture capital industry is the largest and most developed in Europe accounting for nearly 40% of total annual private equity investment. |
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The Venture Capital Industry |
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The minimum investment is around £5,000. An investment in VCTs may be suitable where you are prepared to take a higher risk with a small proportion of your investments. |
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Past performance is no guarantee of future returns. An investment into a VCT is intended as a long-term investment. The value of shares in a VCT and the income from them may fall as well as rise and investors may not get back the amount originally invested.
There may be sudden and large falls with this type of investment. There is a risk that you might not get back any of your original investment. The price at which the shares in a VCT are traded may not reflect the net asset value of the Fund. The value of tax savings and eligibility to invest in a VCT will depend on individual circumstances.
These notes are intended as a guide only and do not replace the full prospectus that accompanies each VCT recommendation. There can be no guarantees that the VCT will meet its objectives or that suitable investment opportunities will be identified.
An investment in a VCT will not be suitable for all investors. If you have any doubts you should seek advice from us or another firm of independent financial advisers (IFAs). Investments made by the VCT will be in companies whose shares are not readily marketable and therefore may be difficult to realise. The fact that a share is traded on AIM (Alternative Investment Market) or OFEX does not guarantee its liquidity.
The spread between the buying and selling price of such companies’ shares may be wide and thus the mid-market price used for valuation may not be achievable in the event of sale. Whilst it is the intention of the Directors of a VCT that that the fund will be managed so as to qualify as a VCT, there can be no guarantee that it will qualify, or that such status will be maintained. A failure to meet the qualifying requirements could result in the fund losing the tax reliefs previously obtained, resulting in adverse tax consequences for you, including a requirement to repay the 40% income tax relief.
It is possible for you to lose your tax reliefs by taking or not taking certain steps, and you are advised to take independent financial advice on the tax aspects of your investment. Levels and bases of, and relief from, taxation are subject to change. Such changes could be retrospective.
Although VCTs are admitted to the Official List of the UK Listing Authority and trade on the London Stock Exchange’s market for listed securities, there will most likely be an illiquid market and you may find it difficult to realise your investment, especially during the early years of the life of the fund.
To the extent that a relatively small level of funds are raised by the particular VCT, the manager may not be able to diversify its portfolio sufficiently. VCTs invest in companies with gross assets of not more than £15m prior to investment. Such companies generally have a higher risk profile than larger ‘blue chip’ companies. |
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Please let us know if you would like to receive a Securities Note (ie the prospectus) for any of the VCT offers. Email direct@arch-fp.co.uk or telephone 01483 204600. In two cases you can download these from our website. |
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Arch Financial Planning Limited Arch House, Collins Court, 39 High Street, Cranleigh, Surrey GU6 8AS Tel: 01483 204600, Fax: 01483 204611
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