Add them together and you probably get a fair impression of the complex flavours of a VCT, a special investment package devised three years ago to persuade investors to channel money into small but growing UK companies that might otherwise be unable to raise capital from conventional sources such as banks.
Income and capital gains earned in VCTs are all tax free, much like PEPs; but, as an extra incentive, taxpayers get a 20 per cent tax credit up front on the money they invest, and they can defer an equal amount of existing capital gains tax liability, incurred between 12 months before and 12 months after the investment in a VCT, until they eventually cash it in. The maximum amount of tax relief available to any single individual is limited to pounds 100,000 in the first year and in each subsequent year. Couples can both qualify, although they cannot transfer the assets between themselves.
The money has to be invested in companies that are not quoted on the main stock market, and which do not have a market value greater than pounds 10m at the time that the investments are made. In order to spread the risks the trusts that handle the investments can put up to pounds 1m, but not more than 15 per cent of their total assets, into a single company.
Up to 70 per cent of the capital subscribed into a trust has to be invested in qualifying companies within three years of the share issue, but the balance of 30 per cent can be put into ultra-safe investments such as government securities or shares in blue-chip companies. Venture capital trusts must themselves be listed on the stock exchange so that investors can sell their shares whenever they wish or need to do so. Tax relief is forfeited, however, if investors do sell within the first five years.
Because of the investment rules the shares in a VCT are unlikely to rise in the first five years and may even fall, but all the VCT companies that have existed for the past year or more have paid tax-free dividends, according to the David Aaron partnership of independent financial advisers, which has written a guide to current VCTs.
Over the last year VCTs have underperformed the average of all investment trusts and international income growth trusts, but they have equalled the performance of UK smaller companies. Over five years they have outperformed all three other categories. At this time of the year no less than 12 venture capital trusts are raising new money before the end of the tax year. Minimum subscriptions are as low as pounds 3,000.
If the rules for individual savings accounts (ISAs) are less generous than for PEPs, the relative attractions of VCTs could become greater from April 1999. But investors should remember they are not interchangeable assets.
q The AITC sends out performance figures on existing VCTs to callers on 0171-431 5222. Current offers include Advent 2 VCT (call 0171-292 0285) or contact an independent financial adviser. David Aaron's guide to VCTs is available to readers of the 'Independent on Sunday' for pounds 2 by writing to Shelton House, High Street, Woburn Sands, MK17 8SD.Reuse content