Venturing out for a trusty return on your cash

If you like risk and diversification, venture capital trusts fit the bill

Venture capital trusts are back in the business of raising money, despite the Government's decision to trim their generous tax breaks in last year's Budget.

VCTs are collective investment funds that back small, often start-up, companies and therefore tend to be high-risk investments. First launched 12 years ago, they have always offered a range of tax breaks to encourage private investors.

Originally, investors were given a 40 per cent income tax relief on their investment, and could use the funds to defer paying tax on capital gains earned on other investments.

Today, the CGT relief is no more and investors enjoy an income tax rebate of only 30 per cent. Even so, for investors with an appetite for risk and a diversified portfolio, VCTs can be lucrative - small businesses sometimes turn into spectacular growth stories.

The 30 per cent rebate means that individuals are in effect paying only 70p for every £1 they invest, giving considerable downside protection should the fund fail to perform. And if their investment grows, or the fund pays out dividends, these are also all tax-free.

There are four main types of VCT. Generalist funds tend to invest across a wide range of unquoted companies, regardless of sector. Like all VCTs, however, they can only invest in companies with net assets of less than £8m at the time the investment is made.

The second, most common, breed of VCT is AIM funds, which invest solely in companies quoted on that market.

Then there are specialist VCTs, which invest in unquoted companies from specific sectors. Of the funds open this year, for example, Ibis has a VCT investing solely in media companies, while Sitka offers a fund focused on healthcare.

The final variety of VCTs - a relatively new kind - are the limited-life VCTs, which aim to provide investors with a degree of capital protection and to return their cash at the earliest possible opportunity. A condition of the VCT tax relief is that investors must hold on to their investment for a minimum of five years, and limited-life funds tend to work towards this deadline.

Investors are limited to putting £200,000 each tax year into VCTs, so most money goes into the funds in either March or April, at the end of the tax year or at the start of the new one. This year, however, has so far proved one of the slowest on record, owing to the reduction in the tax breaks.

Martin Churchill, a VCT analyst who runs the www.taxefficientreview.com website, says only about £90m of the £460m capacity put on sale has been filled so far this year.

Alastair Conn, the managing director of NVM Private Equity, which manages the Northern range of VCTs, says his company decided against launching a new fund this year. "Our research indicated that as a result of the 2006 Budget changes, investor demand would be well down from the peak reached last year," Conn says. "We think the market is unlikely to exceed £200m this time."

Churchill worries that the tax breaks could be pared back further in future, pointing out that about half this year's new VCTs are so-called limited life funds, whose main aim is simply to preserve investors' tax relief. Most do this by loaning a large proportion of money to companies for a fixed period rather than directly investing in them. "I question - if these funds are successful - whether the Treasury will retain its very supportive attitude towards these products," Churchill says. "The idea behind these funds is not really what the Chancellor had in mind for VCTs."

The Government has committed to keep the current tax breaks in place until the next election, it is possible that regulations will be tightened to ensure that VCTs continue to invest across the entire universe of smaller companies.

If you're interested in investing in a VCT this year, there are about 20 funds to choose from. Churchill says investors should pay close attention to managers' track records and how long team have worked together, as well as fees and charges. VCTs will typically levy an initial charge of about 5 or 6 per cent, taking a further 3.5 per cent or so each year, as well as additional fees if the fund performs well.

Funds to back

* Fund management groups such as F&C, which runs the Baronsworth range of VCTs, have a strong and proven track record at picking good unquoted companies. Similarly, Close Brothers has a very good track record on the AIM sector.

* Although past performance provides no guarantee of future returns, finding a strong management team is particularly crucial when it comes to VCTs. Over the 12 years since they were launched, less than half have managed to deliver investors a positive total return. The very worst performers have lost shareholders more than 60 per cent of their money.

* Ben Yearsley, an investment manager at Hargreaves Lansdown, the independent financial adviser, recommends Electra Kingsway, a generalist fund, and Foresight 2, a specialist technology VCT, as two of the best funds this year.

* Foresight's first fund remains the best-ever performing VCT, while Electra has built a solid reputation as a small company investor over the past few years - making money for investors in both its funds.

* Unless you're an experienced investor, seek financial advice before you commit to buying a VCT. To find an adviser in your area, visit www.unbiased.co.uk or call 0800 085 3250. For more information on VCTs in general, visit www.taxefficientreview.com.

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

Arts and Entertainment
Buttoned up: Ryan Reynolds with Helen Mirren in ‘Woman in Gold’
filmFor every box-office smash in his Hollywood career, there's always been a misconceived let-down. Now he says it's time for a reboot
News
people
News
Actress Julianne Moore wins the Best Actress in a Leading Role Award for 'Still Alice' during the 87th Annual Academy Awards in Hollywood, California
people
Sport
Ross Barkley
footballPaul Scholes says it's time for the Everton playmaker to step up and seize the England No 10 shirt
News
'We will fix it': mice in the 1970s children’s programme Bagpuss
science
Life and Style
2 Karl Lagerfeld and Choupette
fashion
Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    SThree: Graduate Recruitment Resourcer

    £20000 per annum + commission: SThree: Sthree have an exciting opportunity for...

    Recruitment Genius: Telesales Executive - OTE £32,000+

    £18000 - £32000 per annum: Recruitment Genius: A Telesales Executive is requir...

    Ashdown Group: Marketing Manager - B2B, Corporate - City, London

    £45000 - £50000 per annum + benefits : Ashdown Group: A highly successful, glo...

    Neil Pavier: Commercial Analyst

    £50,000 - £55,000: Neil Pavier: Are you a professionally qualified commercial ...

    Day In a Page

    War with Isis: Iraq declares victory in the battle for Tikrit - but militants make make ominous advances in neighbouring Syria's capital

    War with Isis

    Iraq declares victory in the battle for Tikrit - but militants make make ominous advances in neighbouring Syria
    Scientists develop mechanical spring-loaded leg brace to improve walking

    A spring in your step?

    Scientists develop mechanical leg brace to help take a load off
    Peter Ackroyd on Alfred Hitchcock: How London shaped the director's art and obsessions

    Peter Ackroyd on Alfred Hitchcock

    Ackroyd has devoted his literary career to chronicling the capital and its characters. He tells John Walsh why he chose the master of suspense as his latest subject
    Ryan Reynolds interview: The actor is branching out with Nazi art-theft drama Woman in Gold

    Ryan Reynolds branches out in Woman in Gold

    For every box-office smash in Ryan Reynolds' Hollywood career, there's always been a misconceived let-down. It's time for a rethink and a reboot, the actor tells James Mottram
    Why Robin Williams safeguarded himself against a morbid trend in advertising

    Stars safeguard against morbid advertising

    As film-makers and advertisers make increasing posthumous use of celebrities' images, some stars are finding new ways of ensuring that they rest in peace
    The UK horticulture industry is facing a skills crisis - but Great Dixter aims to change all that

    UK horticulture industry facing skills crisis

    Great Dixter manor house in East Sussex is encouraging people to work in the industry by offering three scholarships a year to students, as well as generous placements
    Hack Circus aims to turn the rule-abiding approach of TED talks on its head

    Hack Circus: Technology, art and learning

    Hack Circus aims to turn the rule-abiding approach of TED talks on its head. Rhodri Marsden meets mistress of ceremonies Leila Johnston
    Sevenoaks is split over much-delayed decision on controversial grammar school annexe

    Sevenoaks split over grammar school annexe

    If Weald of Kent Grammar School is given the go-ahead for an annexe in leafy Sevenoaks, it will be the first selective state school to open in 50 years
    10 best compact cameras

    A look through the lens: 10 best compact cameras

    If your smartphone won’t quite cut it, it’s time to invest in a new portable gadget
    Paul Scholes column: Ross Barkley played well against Italy but he must build on that. His time to step up and seize that England No 10 shirt is now

    Paul Scholes column

    Ross Barkley played well against Italy but he must build on that. His time to step up and seize that England No 10 shirt is now
    Why Michael Carrick is still proving an enigma for England

    Why Carrick is still proving an enigma for England

    Manchester United's talented midfielder has played international football for almost 14 years yet, frustratingly, has won only 32 caps, says Sam Wallace
    Tracey Neville: The netball coach who is just as busy as her brothers, Gary and Phil

    Tracey Neville is just as busy as her brothers, Gary and Phil

    The former player on how she is finding time to coach both Manchester Thunder in the Superleague and England in this year's World Cup
    General Election 2015: The masterminds behind the scenes

    The masterminds behind the election

    How do you get your party leader to embrace a message and then stick to it? By employing these people
    Machine Gun America: The amusement park where teenagers go to shoot a huge range of automatic weapons

    Machine Gun America

    The amusement park where teenagers go to shoot a huge range of automatic weapons
    The ethics of pet food: Why are we are so selective in how we show animals our love?

    The ethics of pet food

    Why are we are so selective in how we show animals our love?