VCTs are the new pension some as the sector pulls in £429 million


#1

With pension contribution limits and pension pots capped, more and more high rate tax investors are turning to the VCT sector. Venture capital trusts
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#2

I find them to be too complicated and high fees. I’d rather invest in a normal fund or trust that’[s not as opaque and without high charges.

My IFA and accountant tried several time to sell them to me.


#3

I don’t think they’re that complicated @khalidkhan but the tax benefits are maybe a wee bit complex. What they are though is expensive and risky.

Some have performed very well but you need to be careful about when you invest in them in terms of what part of the stock market/economic cycle we’re in because small company fund suffer more in recessionary and downturn times.

The charging structure is more like that of private equity which is something I’ve never understood and which pouts me off them (though being a Mum now my salary has dropped because I’m working part time).


#4

Another downside to VCTs is that there is little or no incentive for the manager grow the NAV by retaining some of the income earned and gains made, and re-investing these into new assets. Instead, the focus tends to be on maximising the distributions to investors - which is fine for income seekers, but not necessarily for total-return investors.

Whilst there are dividend re-investment schemes around, I’ve always thought it a bit of a contradiction to have capital returned to me which I then use to buy back into more capital of the same company: the company has reduced its capital - and its capacity to generate returns in the future - and I then buy back into that reduced capacity.

Sure, VCTs do grow their assets under management by issuing new shares, and a good many investors benefit from this with the upfront tax relief. And that is where the issue lies: there is greater incentive all round for the return of assets to be maximised, and for an increase in assets to be achieved via a fund raising. It’s tax wot done the wagging, innit!


#5

I agree @arkwelder on the rather perverse logic of the vehicle. However, given you need to hold for 5 years minimum to keep your tax break, and that includes the shares of any reinvested divis, they should be seen as a very long term investment. Minimum would be 10 years. I advise on these if clients can add each year, reinvest dividends until retirement and then switch to paying out tax-free income. Only over the long term does the gain in the holding beat the tax relief. Some see them as high risk but given they are diversified, the good ones are no different to a small cap/micro cap trust. Those who are looking at Gervais Williams’ new push into AIM should compare with VCTs, and maybe Herald investors too!

I think the rise in interest, if that is the case, is simply because the pension legislation can dramatically change in both directions at the drop of a hat. At best small changes are always happening. ISAs are allowed now to be quite large so when is the cap coming on them, to be taxed beyond a certain size? The world of VCTs seems little touched and is a good long-term way to build up a tax-free income stream will more support (30% relief) than pensions. It is a matter of balance and opportunities in the end. Keep your options open!