How to venture into the high-flying world of 20 per cent tax relief
Saturday 11 November 1995
By the end of the tax year, half a dozen trusts will be up and running, but demand so far has been slow. One reason is that Tessas and low-risk Peps are suitable for everyone with a bit of spare cash. VCTs are not.
Designed by the Government to fill the funding gap for smaller companies, VCTs are turbo-charged personal equity plans for the wealthier investor. They have an annual investment ceiling of pounds 100,000 per person against pounds 9,000 for Peps.
The up-front tax breaks are income tax relief at 20 per cent and capital gains reinvestment relief at 40 per cent, although income tax relief is forfeited if the investor sells VCT shares within five years of issue.
Stuart Dyer, investment marketing director of Friends Provident Asset Management, says: "Anyone with less than pounds 50,000 in equities should not be in VCTs." He suggests 5 per cent of a portfolio be allocated to VCT qualifying investments: unquoted companies whose gross assets do not exceed pounds 10m.
Memories of the ill-fated business start-up and expansion schemes of the 1980s dog the new VCTs, although they are very different animals. VCTs are pooled vehicles, with risk spread across many companies. The maximum investment per company is pounds lm, and 70 per cent of a VCT's funds must be invested within three years of launch. Few VCT managers intend to invest in start-ups. Most prefer established companies generating healthy profits.
Managers launching VCTs so far are experienced venture-capital players. Baronsmead, which raised a modest pounds 8.66m with its offer, which closed this week, has invested in 36 companies in the past three years, many of which would be VCT-qualifying. The return, measured by dividends, redemption of preference shares, asset revaluations and realisations, was 26.5 per cent per annum to the end of June.
Three of Baronsmead's investments have gone bust, but star performers include Stoplock, the West Sussex company making the ubiquitous yellow car steering-wheel immobilisers, and Edwin Trisk Systems in Sunderland, which can respray a car door in four minutes.
David Thorp of Baronsmead says the VCT will only invest in established companies able to generate a good income. The yield element of Baronsmead's 26.5 per cent return is 11.1 per cent a year. Add the VCT tax breaks and the return can be tripled, says Richard Hargreaves, managing director.
Baronsmead shows that an investment of pounds l,000, paying an annual gross yield of 4 per cent and notching up five-year capital growth of 20 per cent, would after five years be worth pounds l,240 to a higher-rate taxpayer in a conventional investment trust, pounds 1,400 in a pepped trust and pounds 1,600 in a VCT because of the up-front income tax relief. Capital gains tax relief on the gains reinvested in a VCT makes the figures even better.
Mr Hargreaves points out that while few pay CGT, many are locked into equity portfolios because of potential tax. Sellers of businesses often accept loan stock as payment, which would produce a CGT liability if redeemed. Both are ideal VCT investors.
A pounds 100,000 capital gain, which would be reduced to pounds 60,000 through tax, can grow to pounds 120,000 if the gain is rolled into a VCT, and the 20 per cent income tax credit claimed to boot. The CGT is payable on disposal of the VCT, whether it has doubled the initial investment or halved it.
VCT managers are confident they can produce a decent return and would be disappointed if the underlying investments did not outperform the stock market over five years.
The tax breaks of VCTs will exert a big influence on both fund-raising and the trading of VCTs. The share price of the first VCT from Murray Johnstone, which has raised pounds 18m since September out of a hoped-for pounds 30m, has gone to an instant premium to net asset value. Iain Tulloch, investment director of Murray Johnstone, reckons VCTs will be tightly held because of the five-year requirement to qualify for up-front income tax relief, and will only go to a discount to NAV if underlying investments,fare badly.
Friends Provident launched its VCT on Wednesday. At least half a dozen more VCTs are reported to be in the pipeline for early next year to catch the tax window.
Investors must pick their managers with care. Emerging company investment is a highly specialised area involving higher costs and a more practised eye. Sir David Cooksey, chairman of Advent, which is launching its VCT in the new year, says: "You must work at investments to make a success of them."
Running costs are therefore higher than in other pooled investments and are expected to average 2.5 per cent a year.
VCTs are untried and untested investment vehicles, but their tax breaks should make even pedestrian underlying performance look good. Richard Twydell of stockbroker Henderson Crosthwaite says that higher rate tax payers with broadly based portfolios should seriously consider VCTs, especially if they have used up their Pep allowances.
24 April 2015 07:30 PM
01 May 2015 12:00 AM
More than £60m was paid out to more than 2 million prizewinners this month
28 April 2015 05:20 PM
Why can’t we just have open and honest charges, without all the cross-subsiding?
28 April 2015 03:50 PM
With the pound at a high against the euro, it pays to buy now before uncertainty post-election
17 April 2015 06:00 PM
23 April 2015 12:00 AM
Experts disagree about the 7% increase over the past year
22 April 2015 07:29 AM
Too many mortgages are being sold with misleading gimmicks
21 April 2015 09:54 AM
The firm’s revenues slumped by a third to £217 million in 2014
21 April 2015 12:00 AM
The average quote for a buildings and contents policy has fallen by 3.6 per cent
10 April 2015 07:00 PM
15 April 2015 12:56 PM
Joining Barclays Blue Rewards costs £3 a month but then lets customers in for handouts of up to £15 a month
15 April 2015 07:27 AM
A charity is urging anyone struggling financially to see if they could get help from the state
13 April 2015 11:39 AM
Video: With an election looming, a hung parliament could hit sterling
03 April 2015 08:00 PM
03 April 2015 08:00 PM
Crowd-to-let: How crowdfunding sites can give investors a slice of the property market for £500
Q&A: What’s the best way to invest for our baby?
Simon Read: 'Seven Families campaign offers an escape from financial and emotional distress'
After the election: What will Britain's financial future look like on 8 May?
General Election 2015: How you vote next week could affect your finances
- 1 Which country would be hardest to invade?
- 2 Indonesia executions: Death row British grandmother Lindsay Sandiford will refuse to wear a blindfold when she faces firing squad
- 3 The man who filmed the Freddie Gray video has been arrested at gunpoint
- 4 How the language you speak changes your view of the world
- 5 Royal baby girl born: Duchess of Cambridge's second child will be a princess thanks to Queen
Over 50,000 families shipped out of London boroughs in the past three years due to welfare cuts and soaring rents
EU asylum policy is 'a direct threat to our civilisation', says Nigel Farage
Indonesia executions live: 'Hysterical' families heard prisoners being shot dead by firing squad
The Rothschild Libel: Why has it taken 200 years for an anti-Semitic slur that emerged from the Battle of Waterloo to be dismissed?
General Election 2015: SNP and its activists 'openly racist' towards the English, Farage says
EU exit would hit UK economy much harder than neighbouring countries, study finds
iJobs Money & Business
£16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...
£24000 - £28000 per annum: Recruitment Genius: A Senior SEO Executive is requi...
£16000 - £18000 per annum: Recruitment Genius: An Online customer Service Admi...
£18000 - £22000 per annum: Recruitment Genius: This global, industry leading, ...
Day In a Page
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.
In a row of eight detached Georgian residences, this five-bedroom home offers views of The Sound, Mount Edgcumbe and Cornwall from its impressive veranda and full-length balcony.
If you love cooking for friends this two-bedroom flat - complete with views of the iconic Battersea Power Station and an open-plan kitchen/dining area - will go down a treat.
Located above Grasmere village, this five-bedroom home is arranged over three floors and offers countryside views across Grasmere Lake towards Silver Howe.
Surrounded by the Western fells, this five-bedroom Georgian home retains many original features including panel-plastered ceilings, sash windows and fireplaces.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B, subject to change of use permissions.
A former period coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, office, kennels and an outbuilding that's currently used as a gym.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
This four-bedroom home has exposed brick chimneys and a vaulted ceiling in a breakfast room that's ideal for summer entertaining - the doors open to the patio and garden.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park