The Venture Capital Schemes – Are the Tax Breaks worth the Risk?


#1

Originally published at: http://whichinvestmenttrust.com/the-venture-capital-schemes-are-the-tax-breaks-worth-the-risk/
The purpose of the Venture Capital Schemes is to provide funding for companies that are in the relatively early stage of the business cycle. At the time of writing, there are four separate schemes in the UK, each one offering generous tax breaks to investors as a reward for taking on the risks associated with…


#2

Really good article that sets out all the riskier venture capital vehicles in a more neutral way than I’ve read anywhere before. I think this is one to bookmark. I hope @satwaki_chanda keeps writing this stuff because he seems to know what he’s on about and doesn’t seem beholden to the venture industry.


#3

I agree, very insightful and easy to read description of the various venture structures. Better than the kind of material I have read from Octopus and the like.


#4

Thank you very much for your kind comments, both @mikemoore and @AlanT

Alan, it’s really ironic your mentioning Octopus, because shortly after I first wrote that article, I was sent this piece by a financial journalist:

Octopus losses are a ‘wake-up call’ for EIS industry


#5

Yes I agree with the others, it’s a well written piece that explains the pros and cons of the different types of venture funds.

It is a confusing area for ordinary folk like me @satwaki_chanda who don’t command your impressive understanding of these complex tax structures.


#6

Specifically with reference to VCTs - the current offer for subscriptions are being taken up very quickly, which doesn’t provide much time to consider your options.
I applied for British Smaller Companies - two days after receiving the mailing which went to existing shareholders, and was still too late.
I also applied for Unicorn AIM and I think I just made it in time - by the time you read about the offers in magazines or on share dealing dealing web sites - the offer has closed.

This is mainly due to the recent VCT rules changing, so most funds are doing very limited fund raising.

I would advise newcomers to avoid applying at the moment, and see hwo things settle down over the current year.


#7

Good article @satwaki_chanda that lays out the differences while highlighting that this is no ordinary sector, with regulation in abundance. The EU can be fully blamed for the recent changes to VCTs, as apparently even HMRC thought they were fierce. It has left the VCT world a little riskier (both investment risk and regulation risk). Personally I prefer VCTs to the other forms since these become a constant that can be compared, EIS etc. have a short life span generally. I think they also offer the fairest deal in terms of potential gains versus losses and fees. Most EISs that I have seen have massive performance fees that kick in far too early IMHO. I reckon that by the time we retire (or want our pension pots) we will all wish we used VCTs more!

I see them as a lifetime hold, not just the five years to keep my tax break. If you don’t need income yet then find dividend reinvestment schemes (DRIS) which will give you shares for your dividend. This not only increases your returns exponentially but gives you a little more off your income tax bill each time. Of course, each group of shares needs to be held for 5 years, not just the first purchase.

They are higher risk, but I think only slightly. Here’s why; first, they are collectives so if one or even five go bust the result is not too catastrophic. Second, they are real companies with boards and proper governance. Third, diversify - there are many good ones out there. I tend to go for generalists since I understand this world and don’t try and invest in “clever” things. The highest risk which exists for all types of vehicle is the political one and that is only covered by fingers being crossed. The underlying businesses are only a little different than say MINI - Gervais William’s micro cap trust. The main one being it is within the first 7 years of their life, but I think 30% tax break more than evens this out!

The biggest issue with a VCT is the IHT relief - there isn’t any! But for some there could be the scenario of gifting the VCTs to the children as a PET (seven years before in the clear) and then start using the pension which IMHO should be left untouched if possible since its can now be used as an IHT avoidance route.

@scjim the recent offers have been very small, or nothing at all, and taken up quickly since most left it until the Act was signed by Queenie in Nov. Octopus’s offer of £150m is very worrying since most sensible managers are still working out how they are going to deploy their cash (hence the small offers). The hunting grounds of the VCTs has shrunk too. Nout wrong with British Smaller :wink: and I also got some Unicorn AIM (but no DRIS offered sadly).


#8

I’ve never heard of a Dividend Reinvestment Scheme @james_pigott, is this available just for VCTs?

@satwaki_chanda article was really good, and the comments here from @james_pigott and @scjim have added extra colour.

One is much better informed.


#9

Thank you very much to all those of you who liked the article.

I’m flattered that you all think I know a lot about it - I’ll let you all into a little secret. Tax experts also find this topic confusing. The rules are so complex and get more and more complex each year, that even those who specialise in the field can get caught out.

That example - Bill, Steve, Jeff and Mark - that sort of example is something that has happened in real life. Taxation Magazine has a queries section where other practitioners send in their tax questions (under a pseudonym of course). Invariably there’s one on EIS and it usually involves some small point in the legislation that no one had ever heard of before. So many of them.

In the past, one could have taken a relaxed view on the Enterprise Investment conditions breaking down. Although investors might have to pay back some income tax relief, you could still benefit from a 10% CGT rate, because we had something called taper relief. We still have the 10% rate for entrepreneurs’s relief but it doesn’t apply to everyone. People who work for the company and hold more than 5% - but not to people like business angels and the like. Latter have to rely on EIS, which can be really off-putting.


#10

Well that’s refreshingly humble and honest of you @satwaki_chanda but the truth is your experience and expertise is like a guiding hand.

Your contributions here on this website and in these forums is very welcome, and helpful, I’m sure we all feel that.


#11

Many shares have their own Dividend Re-investment Scheme (DRIS) @berkely when you hold the shares through the company nominee (Equiniti etc.). If you hold the shares via a more general broker (HL, ATS etc) then the scheme acn’t be used.

The advantage for VCTs, is that the re-invested dividend is generally used to issue new shares (rather than buy in the market) and so is eligible for the tax savings.
Most VCTs offer their new shares at NAV rather than the current (usually lower) share prices - so the tax relief is important.
British Smaller Companies is particularly good as the DRIS actually issues new shares at a 5% discount to NAV -so is generally a better deal than investing via the new share placings.