Venture Capital Trusts (VCTs)

Venture Capital Trusts (VCTs) - tax breaks aren't everything.

Consumers should consider all the issues before deciding to invest in Venture Capital Trusts. Companies are marketing VCTs strongly since the government changed the tax relief on investments in VCTs. Investors receive 40% income tax relief on investments made in the 2004/5 and 2005/6 tax year. However, VCTs are not the same as other tax-efficient products such as ISAs and you should make sure that you fully understand the potential risks, as well as the tax benefits, before investing.

What are VCTs?

Venture Capital Trusts are similar to Investment Trusts but they invest in companies that are not quoted on the stock exchange, although they can be AIM (Alternative Investment Market) listed. VCTs must invest 70% of their funds in UK companies with gross assets of no more than £15 million at the time of investment. They can invest the remaining 30% in other ways from cash deposits through to riskier investments, including derivatives.

Investors in VCTs can get tax relief of 40%, freedom from any capital gains tax on their investment and no income tax on any dividends paid. However, investors must hold their VCT investment for three years - if you sell your VCT shares within three years, the Inland Revenue will claw back your tax relief. You should consider a VCT investment as long-term - many commentators suggest 7 to 10 years is necessary.

What do you need to know?

VCTs may be a useful, if spicy, addition to a broad portfolio of investments. But if you are thinking of investing in a VCT you should read the available information, such as the VCT prospectus, mini-prospectus and marketing material, thoroughly to ensure that you understand the risks.

Are VCTs risky? The short answer is that they are riskier than, say, the average unit trust because the underlying investments are high-risk. They invest 70% of their capital in small companies that the VCT manager believes will be profitable. However, some of these companies may fail, so you may not get all your capital back.

VCTs traditionally hold the remaining 30% of their capital in cash, but in some cases invest it in other, riskier investments.

You may find it difficult to sell your VCT share after three years as there may be a shortage of buyers. You should consider what share buy-back arrangements may be on offer.

You should consider what information is available and how you will check how your investment performs.

You should also consider the charges, in particular any performance fees, and what effect they will have on your investment.

You should also consider getting professional advice.