I have been advising my clients on VCTs for more than 10 years and my conviction in the usefulness of these products for suitable clients has only increased over this time.
By way of illustration, one investment arranged for a client in April 2007 has already paid back 49p in dividends from the £1 invested, with the net asset value still being around 87p. This is on top of the initial income tax relief of 30p. This clearly demonstrates the value of such investments, which provide investors with the opportunity of attractive tax relief alongside annual dividend payments.
The incentives for investors include:
l Income tax relief of 30 per cent on the amount invested.
l No liability to income tax on dividends generated.
l No liability to capital gains tax on any gains made.
The maximum per tax year that can be invested into a VCT is £200,000 and the income tax relief is clawed back if the shares are held for less than the five-year minimum holding period. There are various conditions that a company must fulfil to qualify as a VCT and the managers are charged with running the company so that this is achieved.
We categorise VCT investments into three main types:
l Generalist funds that will not focus on any specific sectors but instead invest across a variety of businesses.
l Limited life VCTs that aim to protect capital and return it at the earliest possible opportunity (ie after five years) but tend to have less scope for high levels of growth.
l AIM VCTs that invest in companies quoted on the alternative investment market.
We have for the most part favoured investing in generalist funds that are risky in nature but have scope for high capital growth, with risk being mitigated through the attractive tax benefits available and through holding a number of separate VCT schemes.
Investors should be aware that VCTs are high-risk investments and specific advice must be taken on appropriate schemes as they apply to individual investors. These investments are not suitable for everyone and must be held for a minimum of five years to retain the initial tax incentives.
Adam Katten is managing director at NLP Financial Management, 020 7472 5550, adam.katten@nlpfm.co.uk