Eliot Kaye, director at Puma Investments, reveals how to make a million from venture capital trust investment.
“Ask the audience or phone a friend?” The words are familiar to many from the iconic game show that offers contestants the opportunity to win a million pounds. But there is, perhaps, an easier way of becoming a millionaire – venture capital trusts (VCTs).
From the moment one makes their first VCT investment, they could be on the way to becoming a VCT millionaire in just five years. In theory, it is possible.
So, how does it work?
Well, if a client and their partner each invested £50,000 in a VCT on a yearly basis, annually re-investing the 30% income tax break and all dividends received (tax free), then, with a fairly modest annual return of 5% on the investment, it would take just five years to hit that million pound mark (see table below).
Historically, VCTs were an alternative asset class which many investors, especially those with a lower appetite for risk, steered clear of.
However, with the annual pension allowance now reduced to £40,000 and a number of VCTs delivering attractive returns, the vehicles are starting to gain more prominence in many people’s portfolios, including as a useful supplement to a pension. As investors seek to invest as tax efficiently as possible, those VCTs that pay out income (tax free, of course) look particularly attractive.
In the tax year just gone, more than £400m was raised for VCTs. The lion’s share of this was invested in VCTs that follow the traditional “venture capital” model. For these investors, the opportunity to reap the potential rewards of getting in early in the life of a young, dynamic company is the main appeal.
However, choosing investments on this basis can be risky – investing in early stage companies is fraught with obstacles and many promising businesses will simply fail to live up to expectations.
A low risk alternative
There is another way for the canny investor wishing to use the attractive tax breaks offered by VCTs without taking such risk. Just under one quarter of the funds raised last year were invested into so-called “planned exit” VCTs. These funds make their investment primarily by way of asset-backed, secured loans.
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