Nearly £1bn has been invested in venture capital trusts (VCTs) since they were launched in 1995. All...
Nearly £1bn has been invested in venture capital trusts (VCTs) since they were launched in 1995. All three trusts that either have matured or are about to mature have already shown profits for investors in terms of tax free dividends higher than the gross dividends before tax of the average share in the FTSE All Share Index.
Baronsmead VCT in particular has shown outstanding overall returns, especially so after taking into account tax reliefs and tax freedom from both dividends and capital gains.
Historically venture capital investment was usually confined to wealthy investors looking for tax efficient returns, but VCTs, despite their name, offer a relatively safer vehicle for medium wealth investors interested in obtaining higher potential tax free returns.
One particular advantage of investing in a VCT is that any capital gains can be distributed to investors totally free of tax. One trust, for example, Foresight Technology which was launched in January 1998 has already returned 103.9% of investor's capital which, for those who invested originally and were able to claim the initial tax reliefs, means that they have already received in cash more than two and a half times their net investment.
Furthermore, the share price stood at 215p as of 21 September, so those investors are also showing a paper profit of a further 115%. This trust is an exception but there are many others where substantial profits have already been made. Some VCTs are still standing at below their issue price but all those which have been in existence for a year or more have paid out tax free dividends.
This is mainly because, owing to the taxation rules, there is, as yet, little market in the shares.
In the first quarter of this year nearly all VCT shares have been snapped up by investors. Some VCTs, for example, Baronsmead were more than twice oversubscribed. In the first quarter of this year compared with the previous year nearly twice as many VCT shares were bought.
Because of the tax reliefs, because VCT fund managers have three years in which to invest in qualifying companies and because no more than £1m can be invested in each individual company, VCTs are often much less risky than investing in an individual share.
Even investors in such popular shares as Marks & Spencer and ICI have learnt this lesson over the past three years when the value of their investments has fallen by over half. To September ICI was down 55.93% over three years and Marks & Spencer down 59.78%.
Furthermore, no tax reliefs are available when buying individual shares. Nevertheless, some VCTs are much more risky than others, those investing in technology shares are particularly so even though the potential rewards from them are much greater.
From a performance point of view those VCTs investing in technology companies and companies listed on the Alternative Investment Market (Aim) have performed better than most asset backed or generalist VCTs, although the latter over the long term may well perform at least as well.
For most investors it is sensible to invest in several VCTs so as to spread the risk.
Investors with larger portfolios should consider investing up to 10% in VCTs or up to £100,000 which is the top limit for the initial tax reliefs in any one tax year. They are suitable for those investors who have already used up their Isa allowances or are investing the maximum allowed in their pension plans.
For pensioners, in particular those who are higher rate tax payers, these investments are a good way of increasing their tax free income. An important point to note is that some of the more conservatively run VCTs initially invest a large proportion of their assets in government securities and even
after three years when they must invest 70% of their assets in qualifying companies the remaining 30% can still be invested in gilts.
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Most, however, aim to invest the vast majority of their assets in qualifying companies, 80% of which are established companies or management buyouts.
This autumn some of the most successful venture capital managers will be launching new trusts or raising more money for existing trusts.
This series of articles highlights some of the top trusts likely to be launched or issuing new shares shortly.
The Government has continued to support the VCT tax concessions, these were improved in the last Budget, the main extra concession being that VCT shares issued after 5 April 2000 need only be held for three years (reduced from five years) to still retain the initial tax reliefs. However, to obtain the full investment benefits of VCTs, the shares should be held for as long a period as possible.
What are VCTs?
VCTs provide capital finance for small expanding companies with the aim of making capital gains for investors. VCTs, which were first introduced over five years ago in the Finance Act 1995, have proved to be much less risky than most people originally thought.
This is partly because the stock exchange has to approve every prospectus. This in turn means that only those managers with proper experience of investing in smaller companies have been able to launch funds.
So far over £950m has been invested in 46 VCT companies since August 1995. To date those VCTs have invested over £400m, in over 450 companies. About 33% of these investments have been in management buyouts, 31% in high-tech sectors such as medical, biotechnology, the computer industry and electronics and 24% in companies quoted on Aim.
About 80% of the total funds have been invested into established businesses with only 20% or so being invested
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