Could 2014 be the year of the venture capital trust?

19th December 2013

Venture Capital Trusts aka VCTS offer some considerable investment benefits but they are not for the faint of heart. But some believe next year could be a winner for these funds.

VCTs are essentially stockmarket listed funds which invest saver’s money into a spread up and coming businesses.

As VTCs invest in fledging firms, they are higher risk investments but also one of the most tax-efficient where a £10,000 investment could cost as little as £7,000. In addition, dividends are tax-free.

Richard Troue, head of VCT Research at fund broker Hargreaves Lansdown, says: “VCTs invest predominantly in small, unquoted companies and are therefore higher risk. The majority of returns come in the form of tax-free dividends as the portfolio matures, making them ideal for long-term investors. In recognition of the higher risks and to encourage investment in an area vital to the economy, the government offers generous tax reliefs to investors, though these should be seen as the icing on the cake not the main reason for investing.”

But Troue believes 2014 could be a great year for the asset class – below he lists five reasons why they are set to prosper.

The UK economy

Economic recovery in the UK appears to be taking hold and smaller companies are often the first to benefit. They tend to be more dynamic and can quickly pounce on new opportunities. This should provide a fertile hunting ground for VCT managers, and many of those we have spoken to are finding plenty of investment opportunities.

Banks reluctant to lend

Banks remain cautious and despite some signs of improvement they are still recovering from the financial crisis. Even for the best companies for whom bank funding is available the experience and support VCT managers can offer is often invaluable. This can give them a competitive edge over the banks and they are able to negotiate deals with attractive terms.

Continued low interest rates

Interest rates are likely to remain at record lows throughout 2014 and investors continue to seek alternative sources of income. Tax-free dividends are the primary source of returns from VCTs and many of the best managers are building excellent track records of paying consistent dividends. Yields in excess of 5% are available, even before considering the effects of VCT tax relief.

Pensions savings cap

Contributions into pension schemes are being curbed from April 2014. The maximum savers can contribute each year is being cut to £40,000 from £50,000, with the maximum that can be accumulated over a lifetime cut to £1.25m from £1.5m. For investors who have used their full ISA and pension allowance VCTs are a great tax-efficient investment vehicle.

Will taxes rise?

Taxes are under pressure to rise and for wealthy investors it is more important than ever to consider tax implications when investing. VCT investors can receive up to 30% income tax relief on their initial subscription (providing the shares are held for at least five years), while all dividends and any capital gain made are also free of income and capital gains tax respectively.

Where to invest?

Troue says: “We prefer top-up offers into existing, established VCTs, where investors gain access to mature portfolios with the potential for early dividends, as opposed to brand new VCTs which can take a number of years to become fully invested and mature.

“We focus on VCTs with experienced managers who have built strong track records and of the VCTs currently fundraising I would highlight the offers from Maven and Mobeus as worthy of consideration.”

 

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