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.
25 July 2014 11:00 PM
A London estate agent yesterday put a price on having a garden. David Pollock of Greene & Co reckons it can increase a property's value by a tenth.
Problem gambling: Amid heavy advertising and a surge in remote sports betting, more and more 16 to 24-year-olds are now seen as 'at risk'
26 July 2014 12:00 AM
25 July 2014 11:00 PM
Payday loan firms have been accused of bombarding financially vulnerable people with nuisance phone calls, after a debt charity reported that a third of its clients were plagued by the messages.
24 July 2014 12:00 AM
A plan to defuse a “mortgage debt timebomb” when interest rates rise is published today amid warnings that 2.3m households could struggle with their repayments.
Current accounts are too costly and confusing, says CMA as it announces investigation into Britain's biggest banks
19 July 2014 12:00 AM
19 July 2014 12:00 AM
11 July 2014 12:20 AM
11 July 2014 12:20 AM
How would you like to be able to choose how your electricity is made and even where it come from? It may sound futuristic and fanciful but the independent supplier Co-operative Energy has made it a reality this week.
11 July 2014 12:20 AM
04 July 2014 03:49 PM
MPs want medical evidence for claims. Will this bring higher premiums?
04 July 2014 11:00 PM
British Gas was yesterday forced to pay back £1m to its customers after mis-selling them energy deals.
- 1 Woman and two children killed by mob in riots over 'blasphemous' Facebook post in Pakistan
- 2 Christians: The world's most persecuted people
- 3 The secret report that helps Israel hide facts
- 4 Richard Dawkins says 'date rape is bad, stranger rape is worse' on Twitter
- 5 Danish TV reporter is all business up top, all party down below
The secret report that helps Israel hide facts
A day in the life of Vladimir Putin: The dictator in his labyrinth
Woman and two children killed by mob in riots over 'blasphemous' Facebook post in Pakistan
A new Russian revolution: The cracks are starting to appear in Putin’s Kremlin power bloc
Were 'Poor Doors' added to mixed developments so wealthy residents don't have to go in alongside social housing tenants?
Arizona execution lasts two hours as killer Joseph Wood left 'snorting and gasping' for air
- < Previous
- Next >
iJobs Money & Business
£350 - £400 per annum + competitive: Orgtel: Project Manager (specializing in ...
£25000 per annum + OTE £40,000: SThree: Orgtel are seeking Graduate Trainee Re...
£45000 per annum + Benefits: Ashdown Group: ** HR Business Partner - Senior H...
£28000 - £32000 per annum + Benefits: Ashdown Group: PA / Team Secretary - Mat...
Day In a Page
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony
A charming four-bedroom Oxfordshire cottage with oak floors and chunky-beamed ceilings, £465,000
A beautiful one-bed flat in a sought-after portered block, with access to Norland Square communal gardens
A one-bedroom flat within a Sixties school conversion with high-spec design and open-plan kitchen, close to Lambeth North Tube, £435,000
A 17th century four-bedroom house, with open fireplaces, cellar and pool, £600,000