Mark Dampier: Dividend twist adds spice to VCT tax tick

The Analyst

When venture capital trusts (VCTs) were introduced in 1995, I am embarrassed to say I was sceptical. In my defence, my appraisal was coloured by their predecessor, business expansion schemes, which were, in the main, very poor products. They were launched not for good business reasons but purely to capture the tax incentives, which invariably led to poor investment outcomes.

I had a eureka moment a few years ago when the dividends from VCTs were brought to my attention. To understand the dividends, one needs to understand how venture capitalists structure their deals. Although they obtain a good equity stake in the business, most of the capital is injected by way of loans with fixed rates of interest. The venture capitalists then passes this income to VCT investors as dividends. Many VCTs offer dividend yields in excess of 5 per cent with the potential for dividends to grow. In the current environment 5 per cent in itself is a great return, but when you consider that it is tax free, no matter what your rate of tax, VCTs become even more attractive.

You then have to take into account the tax relief available. For those investing at launch, the taxman reduces the initial cost by 30 per cent (providing the amount claimed is no greater than the amount of tax you pay). The tax benefits are generous, and this should be seen as icing on the cake rather than the reason for investing. Remember, too, that while you won't get the initial tax relief, you can sometimes also buy in the secondary market, where discounts to NAV of up to 20 per cent can be available.

There are various types of VCTs, but the ones I will focus on today are the Aim VCTs from Hargreave Hale. Aim has been in the press recently because its shares have become eligible for inclusion in Isas for the first time, in order to support the market. So far this seems to have generated a lot of interest among investors.

Yet Aim VCTs have long allowed private investors to invest tax-free into this market. While Hargreave Hale is probably better known for running the Marlborough Special Situations, Marlborough UK Micro-Cap Growth and Marlborough Multi-cap Income funds, it is quietly carving out a respectable track record on its VCTs. This should not be a surprise. Its unit trusts have superlative track records and include Aim shares within them. So this is a team with some pedigree. It is looking to raise more money into its two Aim VCTs with the current offer closing at the end of October.

The two VCTs have identical investment policies, seeking to maximise distributions to shareholders from capital gains and income generated from the investment portfolio. Each aims to pay a 5 per cent distribution yield, although this is not guaranteed. Clearly the Aim market can be volatile, but Hargreave Hale's approach, through fund managers Oliver Bedford and Giles Hargreave, is to be pragmatic and flexible. They recognise there are times when you want to invest more money in stocks and there are times when you want to be more defensive.

The qualifying part of the portfolio is biased towards established and profitable businesses. Aim is an under-researched market and accurate information can be scarce, so the team places great emphasis on getting to know companies and management well. They see 30 to 40 companies a week, both in the office and on site, and they also review the competitors, customers and suppliers of potential holdings.

While they are looking for profitable businesses they are allowed to invest in non-qualifying equities. Here, intelligently, they use the Marlborough Special Situations Fund, enabling them to get exposure to their favoured companies quickly rather than having large amounts sat in cash. If they are cautious on stock market prospects they can switch to cash and fixed interest products.

If you are already using your annual Isa limit or perhaps you have maxed out on your pension contributions, then it strikes me that VCTs are a natural place for some of your money. You do need to take at least a ten-year view and to qualify for the tax relief you must stay invested for at least five years. Personally, I have thoroughly enjoyed the tax-free dividends coming in. They are building up for my own retirement in due course.

Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit hl.co.uk/independent

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    SThree: Experienced Recruitment Consultant

    £20000 - £40000 per annum + OTE + Incentives + Benefits: SThree: Established f...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE 40/45k + INCENTIVES + BENEFITS: SThree: The su...

    Recruitment Genius: Collections Agent

    £14000 - £16000 per annum: Recruitment Genius: This company was established in...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE 40k: SThree: SThree are a global FTSE 250 busi...

    Day In a Page

    Refugee crisis: David Cameron lowered the flag for the dead king of Saudi Arabia - will he do the same honour for little Aylan Kurdi?

    Cameron lowered the flag for the dead king of Saudi Arabia...

    But will he do the same honour for little Aylan Kurdi, asks Robert Fisk
    Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

    Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

    Humanity must be at the heart of politics, says Jeremy Corbyn
    Joe Biden's 'tease tour': Could the US Vice-President be testing the water for a presidential run?

    Joe Biden's 'tease tour'

    Could the US Vice-President be testing the water for a presidential run?
    Britain's 24-hour culture: With the 'leisured society' a distant dream we're working longer and less regular hours than ever

    Britain's 24-hour culture

    With the 'leisured society' a distant dream we're working longer and less regular hours than ever
    Diplomacy board game: Treachery is the way to win - which makes it just like the real thing

    The addictive nature of Diplomacy

    Bullying, betrayal, aggression – it may be just a board game, but the family that plays Diplomacy may never look at each other in the same way again
    Lady Chatterley's Lover: Racy underwear for fans of DH Lawrence's equally racy tome

    Fashion: Ooh, Lady Chatterley!

    Take inspiration from DH Lawrence's racy tome with equally racy underwear
    8 best children's clocks

    Tick-tock: 8 best children's clocks

    Whether you’re teaching them to tell the time or putting the finishing touches to a nursery, there’s a ticker for that
    Charlie Austin: Queens Park Rangers striker says ‘If the move is not right, I’m not going’

    Charlie Austin: ‘If the move is not right, I’m not going’

    After hitting 18 goals in the Premier League last season, the QPR striker was the great non-deal of transfer deadline day. But he says he'd preferred another shot at promotion
    Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

    How Isis profits from destruction of antiquities

    Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
    Labour leadership: Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea

    'If we lose touch we’ll end up with two decades of the Tories'

    In an exclusive interview, Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea
    Tunisia fears its Arab Spring could be reversed as the new regime becomes as intolerant of dissent as its predecessor

    The Arab Spring reversed

    Tunisian protesters fear that a new law will whitewash corrupt businessmen and officials, but they are finding that the new regime is becoming as intolerant of dissent as its predecessor
    King Arthur: Legendary figure was real and lived most of his life in Strathclyde, academic claims

    Academic claims King Arthur was real - and reveals where he lived

    Dr Andrew Breeze says the legendary figure did exist – but was a general, not a king
    Who is Oliver Bonas and how has he captured middle-class hearts?

    Who is Oliver Bonas?

    It's the first high-street store to pay its staff the living wage, and it saw out the recession in style
    Earth has 'lost more than half its trees' since humans first started cutting them down

    Axe-wielding Man fells half the world’s trees – leaving us just 422 each

    However, the number of trees may be eight times higher than previously thought
    60 years of Scalextric: Model cars are now stuffed with as much tech as real ones

    60 years of Scalextric

    Model cars are now stuffed with as much tech as real ones