Mark Dampier: Dividend twist adds spice to VCT tax tick
Friday 13 September 2013
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; request a free guide on NISAs from Hargreaves Lansdown
Children's bookseller wins The Independent's new author search
Board creates magnetic field to achieve lift
Company reveals $542m investment in start-up building 'a rocket ship for the mind'
- 1 Jack the Ripper: Scientist who claims to have identified notorious killer has 'made serious DNA error'
- 2 Banksy arrest hoax: Internet duped by fake online report claiming artist's identity has been revealed
- 3 Former East 17 frontman Brian Harvey turns up at Downing Street and 'demands to speak to Prime Minister'
- 4 Kentucky gang rape: 15-year-old boy left in critical condition after sexual attack by group at party
- 5 Paralysed man Darek Fidyka walks again after treatment by British doctors on brink of 'cure'
Cameron is warned 'no possibility' of UK reducing immigration and that bid to bring in quota on migrant workers would be illegal
Residents should throw a street party and mix with immigrant neighbours, councils told
Russell Brand threatened with arrest after filming outside Fox News headquarters
London bus driver 'kicks gay couple off for kissing'
Lord Freud: Tory welfare minister apologises after saying disabled people are 'not worth’ the minimum wage
Lord Freud hangs on as MPs of all parties 'call for his head' over disability comments
iJobs Money & Business
£23000 per annum + pension and 22 days holiday: Ashdown Group: An established ...
£27000 per annum + pension, 22 days holiday: Ashdown Group: An established ind...
£23000 - £26000 Per Annum: Clearwater People Solutions Ltd: Our client is curr...
£25 - 30k: Guru Careers: A Corporate Actions Administrator / Operations Admini...
Day In a Page
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
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
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
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