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Venture Capital Trusts (Risks (Unlikely to be suitable for those investors…
Venture Capital Trusts
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Aim to achieve returns for their shareholders by investing in other companies, typically smaller companies looking for further investment to expand their own business
The purpose is to encourage individuals to invest in companies not yet listed on any recognised stock exchange
In return for such investment, the VCT shareholders will receive a number of tax benefits
High risk as companies may struggle or fail completely however with funding from venture capitalists many now famous would not have been able to establish themselves
Aimed at wealthier, sophisticated investors who can afford to take a long term view - the FCA suggests that a sophisticated investor is somebody with annual income in excess of £100,000 or investable assets of more than £250,000
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Afford their shareholders the opportunity of indirect investment into a portfolio comprising 20-30 start up companies which they might not ordinarily be to access. Such diversification will also help mitigate the risk of direct investment in only one or two start up companies
VCT will raise money from investors by selling their shares and the funds raised together with any loan capital and then use the money to invest in a portfolio of unquoted and higher risk start up companies which may include companies listed on AIM
The UK government currently offers generous tax benefits to VCT shareholders in terms of both income and capital returns, including tax relief of up to 30%
VCTS must be approved by HMRC and must invest or lend money to unlisted companies which themselves must be qualifying companies
Shareholders may invest in many different companies through different VCTs and ostensibly obtain exposure to maybe 100 different unlisted companies by investing perhaps in four VCTs, but there are maximum amounts of tax benefits. At the time of writing, the maximum annual investment relief can be claimed is on £200,000 and the percentage on which relief can be claimed is 30%. There is no income tax payable on dividend income
The fund manager will target and negotiate attractive deals for investors, and will provide expertise to the start-up companies in order that they themselves can expand and thus provide greater returns for shareholders
A maximum of 15% of the total fund may be invested into any single start-
up company. The primary source of income is the receipt of tax-free dividend payments. VCTs are particularly attractive to those seeking to reduce their tax bill and generate income from their capital. 30% income tax relief for subscriptions in new VCT fund raisings. There is no capital gains tax (CGT) to pay on disposal
Risks
Unlikely to be suitable for those investors with limited capital who may need access to their money in the short term or for whom loss of the investment could cause financial hardship
Inherently higher risk as smaller companies can be prone to failure. They may struggle or fail completely
VCT shares are relatively illiquid and can be difficult to trade it may be especially difficult to sell on the secondary market
Market prices of the shares may not reflect the clue of the underlying portfolio of interests in the company
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Shareholders may receive less than they invest when they sell shares if the company becomes bankrupt or if there is a fall in the value of underlying assets
Investors should also be aware of risks affecting specific VCTs For instance, a further issue arises from smaller VCT funds that fail to raise sufficient money at launch. The resulting portfolio of investments may be more concentrated and it could increase the risks and charges
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It is possible that HMRC could withdraw the tax status of the VCT if it fails to meet the qualifying requirements. If this happens, any tax rebate may have to be repaid. Each VCT will issue a prospectus at launch which gives details of specific risks and it should be read thoroughly before considering an investment
There is an annual management charge, total fees are around 3.5% and will be charged to the fund