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.
27 March 2015 08:30 PM
27 March 2015 08:30 PM
20 March 2015 07:30 PM
How to make the most of Isas: You can save more money now, the returns are tax-free and the rules are flexible
20 March 2015 07:30 PM
13 March 2015 09:00 PM
13 March 2015 09:00 PM
10 March 2015 09:03 AM
The Financial Conduct Authority found non-compliance in all reviewed firms
11 March 2015 11:38 AM
Pension expert John Lawson talks on why improved longevity is something to plan for carefully
06 March 2015 08:30 PM
02 March 2015 10:50 AM
The DWP and the FCA have joined forces to investigate transaction charges in occupational pension schemes
04 March 2015 03:00 PM
The company was found to have unacceptably long call waiting times
27 February 2015 07:30 PM
27 February 2015 07:30 PM
27 February 2015 12:01 AM
The NHS is currently bearing a yearly burden of approximately £1.5bn treating cold-related illnesses every winter
- 1 Tidal launch: The most pretentious lines from Alicia Keys' valedictory speech
- 3 Katie Hopkins attacked me on Twitter — so I reported her to the police for inciting racial hatred
- 4 Tidal: Jay Z's Spotify rival streaming service criticised for making wealthy artists even richer
- 5 Brixton squat flats now costing up to £3k per month show how out of control rent is in London
Ukip supporters are 55 or older, white and socially conservative, finds British Social Attitudes Report
Street preacher quoting from the Bible fined for calling homosexuality an 'abomination'
Woman filmed launching racist tirade against men on the Tube for speaking in 'own lingo'
The West has it totally wrong on Lee Kuan Yew
David Cameron calls Labour 'hopeless, sneering socialists' while announcing 7-day NHS plans
Revealed: Putin's army of pro-Kremlin bloggers
iJobs Money & Business
£45000 - £50000 per annum + benefits : Ashdown Group: A highly successful, glo...
£50,000 - £55,000: Neil Pavier: Are you a professionally qualified commercial ...
£45,000 - £55,000: Loren Hughes: Are you looking for a new opportunity that wi...
Circa £45,000-£50,000 + benefits: Sheridan Maine: Are you a newly qualified ac...
Day In a Page
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
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
A boutique mews house, set around a central courtyard, with three bedrooms and a private roof terrace
A four-bedroom farm-conversion with three bathrooms and two reception rooms
A two-bedroom detached house with ensuite bathrooms and a sun-drenched decked terrace, £750,000
A modern and spacious two-bedroom, penthouse flat with two bathrooms in a prestigious development
A beautifully renovated five-bedroom terrace with three reception rooms and a courtyard garden, £700,000
A four-bedroom period house which has been extended to provide almost 2,500sq ft of living space, £675,000
A pretty three-bedroom Georgian home with a 22ft drawing room and a master suite with a balcony, £525,000
A substanstial family home with five bedrooms and landscaped gardens in the much sought-after Branksome Park area
A well-presented three-bedroom house with front and rear gardens, close to White City station, £475,000
A handsome five-bedroom house in a sought-after location close to the city centre
A five-bedroom country home with valley views, equestrian stables and 27 acres of land, £725,000
A six-bedroom farm house with separate, detached cottages and 371 acres of land
A two-bedroom cottage with parquet floors, chunky beams and an open fireplace
A three-bedrrom flat with 2,733sq feet of living space, a beautiful private garden and 15 acres of communal grounds
A four-bedroom chalet bungalow with three bathrooms and a spacious garden, £525,000