March 2006

VENTURE CAPITAL TRUSTS - USE IT OR LOSE IT.

With so many people disappointed at having recently paid out substantial tax bills, Alan Ball, from Aberdeen based Acumen Financial Planning Limited, takes a look at why investing in a Venture Capital Trust (VCT) is worth considering.

Tax Advantages

Anyone investing in a VCT is entitled to 40% up-front income tax relief. This means that for every £10,000 you invest in a VCT up to an annual maximum of £200,000, the Inland Revenue will send you a cheque for £4,000. This relief is available irrespective of whether you are a lower, basic or higher rate taxpayer but you will have to act quickly as the 40% income tax relief only applies for applications received by April 5th 2006.

A further advantage for people looking for income is that VCTs can pay out any gains they make as tax-free dividends to their investors, although this may be some years down the line. And, just like an ISA, any gains you make on sale of your shares are also free of tax.

Why Invest in a VCT?

Aside from the obvious tax advantages, the number one rationale for investing in VCTs is the risk / return benefit of adding a high performing, lowly correlated asset class to an existing larger portfolio providing added diversification.

A further advantage of VCTs over more traditional investment products is that a VCT manager is only interested in delivering absolute returns. This means that the only reason a VCT manager will invest your money in an individual company is because he/she believes the company in which they are investing is cheap and will rise in value. This is very different to most equity funds, which are designed to deliver a return against a stock market benchmark, irrespective of which way that benchmark moves.

What Are the Risks?

Firstly, you must hold on to your shares in the VCT for three years to retain your income tax relief.

However, the largest perceived risk is that most people believe that the VCT is investing your money in early-stage and start-up companies which are very risky. This isn't necessarily true and a number of VCTs invest in more developed and lower risk companies.

Investors should also look at exit strategies as the second hand market for VCT shares has not fully developed. Many of the bigger players in this market such as Octopus Asset Management offer an annual share buy back facility, however, this is not offered by all providers.

For those people paying income tax, there are now less than eight weeks left to take advantage of this tax relief. At the very least, you may want to think about whether it still makes sense to invest in your ISA this year when you could get the same benefits in a VCT plus the 40% income tax relief.

Alan Ball is a Financial Planner at Acumen Financial Planning and can be contacted on 01224 573 904 or at www.acumen.info.