Venturing out for a trusty return on your cash
If you like risk and diversification, venture capital trusts fit the bill
Saturday 17 March 2007
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.
Switching your current account? Pick one that reflects the way you run your finances
Profiteering? British Gas customers hit again as energy giant fails to pass on profits hike
The most expensive cities in the world 2015
Payday lender Cash Genie forced to repay £20m to ripped-off customers
Five Questions On: GB Energy's new tariff
- 1 Top Gear team of Jeremy Clarkson, Richard Hammond and James May officially heading to Amazon Prime for new car show
- 2 Stuart Baggs: Apprentice star 'The Brand' found dead aged 27
- 3 How to cancel Amazon Prime: after Top Gear hiring, how to leave premium service
- 4 Tesco scraps 'unexpected item in the bagging area' as self-checkouts switch to less 'frustrating' audio
- 5 Living in Spain and commuting to London 'cheaper than actually working in London'
Yvette Cooper: Our choice is years of Tory rule under Jeremy Corbyn – or a return to a Labour government
Labour leadership contender Jeremy Corbyn says 'we can learn a great deal from Karl Marx'
Public anger after French sunbather beaten up by gang for wearing a bikini in Reims park
Labour leadership: New poll shows party is now even 'less electable' than under Ed Miliband
Calais crisis: For desperate migrants it is 'England or death' as they brave dogs, riot police and speeding trains
While we fixate on Calais, the Government is quietly deporting dozens of migrants on 'ghost flights'
iJobs Money & Business
Negotiable: Recruitment Genius: This company prides itself on its ability to p...
Negotiable: Recruitment Genius: This company prides itself on its ability to p...
£800 per day: Ashdown Group: A highly successful, global financial services co...
£20000 - £25000 per annum + competitive: SThree: SThree are a global FTSE 250...
Day In a Page
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
With five bedrooms, this spacious home offers beautiful gardens and modern interiors - set within the popular market town of Bingley.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
In the pretty market town of Bungay, this grade II-listed Mill House is arranged over four floors, offering four bedrooms and three reception areas.
This first-floor flat comes with two bedrooms, an impressive open-plan reception room and two lovely roof terraces.
This five-bedroom home comes with a range of outbuildings including a large barn which could be converted into a self-contained granny-flat or rental.
Moored at Taggs Island and reached via a pretty garden, this two-bedroom houseboat has a vaulted reception room and skylit garden studio - currently a beauty salon.
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.
A contemporary house spread over three storeys, this three-bedroom detached home has large sliding doors that open out to the River Quaggy.
Moored in Chelsea's Cheyne Walk, this houseboat offers two double bedrooms and a teak deck that's ideal for al-fresco dining.
This former village bakery, dating back to the 17th century, is now a three-bedroom detached home just a few miles from the East Sussex coast.
On the picturesque Isle of Man, this four-bedroom character home has a ground-floor shop that's currently run as a newsagents and a flat that would make an ideal holiday let.
In a new collection of flats, this first-floor two-bedroom apartment offers ample entertaining space and a prime view of Furze Green from a private balcony.
This three-bedroom stone-built cottage currently trades as the village store with a restaurant in the annexe and family accommodation on the upper floors.
Previously two semi-detached properties, this five-bedroom home is spread over three floors with a large breakfast kitchen, orangery, office and gym on the second floor.
This five-bedroom home enjoys countryside views over the Blyth estuary to Southwold, offering flexible living space with a ground-floor annexe - ideal for use as a holiday let.
Close to the market town of Eye, this four-bedroom detached home offers a double-height living room which takes the place of the original, 19th-century, chapel nave.
Dating back to the 19th century, this four-bedroom home needs modernising. Spanning three storeys, the red-brick house has a fireplace, a small terrace and a cellar.
Just outside of Cambridge, this single-storey home offers three double bedrooms, a living room with vaulted timber ceiling and ladder steps that lead to a mezzanine study area.
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.
A former coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, an attached office, kennels and an outbuilding that's currently used as a gym.
Located beside an impressive Victorian viaduct, this four-bedroom home has an open-plan living area that is glazed on two sides, with skylights and high ceilings.
A former furniture workshop, this three-bedroom home has high ceilings and painted brick walls, in a village setting only fifteen miles from the coast.
This five-bedroom stone townhouse features a pine staircase and an Inglenuk fireplace, double doors from the lounge give access to an enclosed courtyard.
This five-bedroom, detached home blends traditional and modern design; the sleek kitchen features a gas hob and oven set within an exposed chimney breast.
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.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B or countryside retreat, subject to change of use permissions.
This Grade II-listed three-bedroom home is situated on a private road, just a short walk from the sandy beaches of Frinton-on-Sea.
Less than five miles from Malmesbury, this four-bedroom cottage comes with equestrian facilities and gardens that extend to approximately three acres.
Spanning three storeys, this late-Victorian five-bedroom farmhouse is a spacious family home with a modern interior and B&B potential.
With an original church arch, this triplex one-bedroom church conversion has a light, spacious, feel and comes with a secure off-street parking space.
This recently-refurbished three-bedroom home has bi-folding doors that lead out to a decked seating area - ideal for alfresco dining this summer.
Well-located for coastal walks and popular restaurants, this detached four-bedroom home offers views over farmland, to the Solent, the Purbecks and Bournemouth.
If you love high ceilings, school conversions like this one are bang on the money. This two-bedroom flat is minutes from Burgess Park and the foodie haven at Borough Market.
Set within a church conversion in Bermondsey, this two-bedroom maisonette combines existing features, such as original arches and brickwork, with a contemporary finish.
This four-bedroom Edwardian home offers a combination of original features and contemporary design after a renovation by the current owners.
This four-bedroom home offers a vaulted ceiling in a breakfast room that's ideal for summer entertaining with doors that open to the patio and garden.
On the market for the first time in more than 50 years, this six-bedroom home is a project with vast potential - spread over three floors of living space.
Surrounded by rolling countryside, this four-bedroom barn conversion comes with a self-contained, one-bedroom annexe that could serve as an office or a holiday let.
Located near Harrogate town centre, this five-bedroom Victorian terrace is arranged over three storeys while a current study serves as an optional sixth bedroom.
A ground-floor flat in a country house, located a mile from Sway; this two-bedroom home would make an ideal weekend retreat on the edge of the New Forest.
On a popular residential lane in Caterham on the Hill, this four-bedroom family home offers a secluded garden and a convenient location for local schools and public transport.
Just a short walk from Westerham green, this three-bedroom cottage has a light kitchen with exposed brickwork and double doors that lead to a south-facing garden.
In a prime spot opposite the River Thames, this one-bedroom flat has an 18sq ft reception room with glass doors that open out to a private terrace.
Set in the hills above Llanwrda Village, west Wales, this 18th-century three-bedroom farmhouse has holiday-let potential from a separate barn conversion and annexe.
This charming end-of-terrace townhouse is arranged over three floors, with two double bedrooms and a private courtyard garden located at the rear of the property.
Located in the University area, this semi-detached five-bedroom home is arranged over three floors - there's even a rear garden and off-road parking too.
Only a few minutes' drive from the charming town of Marlow, this two-bedroom home sits on the private riverside estate of Harleyford.
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.