Guide to Venture Capital Trusts
This guide is a short summary and is not intended to be comprehensive. Tax reliefs referred to in this document are those currently in force. Shares in a VCT must be held for five years in order to retain the upfront income tax relief. A VCT should be regarded as a longer-term investment. The levels and bases of taxation and of reliefs from taxation may change. The value of reliefs depends on personal circumstances. If the conditions required for any relief to be given and maintained are not satisfied, the relief in question could be subsequently withdrawn.
This guide is not an invitation, or a solicitation of such an invitation, to subscribe for shares in any VCT. The value of an investment in a VCT may fall as well as rise, and an investor may not get back the full amount invested. The market for VCT shares may be limited and it could be difficult for an investor to realise their holding. An investment in a VCT may not be suitable for all potential investors and advice should be sought from an independent financial adviser authorised under the Financial Services and Markets Act 2000. An investment in a VCT should only be made on the basis of information contained in the prospectus issued in connection with the offering. The information in this guide should not be construed as investment advice on the merits of investing in any particular VCT. This document has been issued and approved by Octopus Investments Ltd, which is authorised and regulated by the Financial Services Authority.
Dated October 2007.
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There are a number of issues you should be aware of when selecting the right VCT for you including:
VCTs invest in private and AIM listed companies. Obviously these companies, individually, carry an above average level of risk. The benefit of investing in a VCT is that you reduce that risk by having a diversified portfolio of such companies. Also, fund managers will usually take a board seat and will be able to exert influence over the management of the business.
Please remember that the value of an investment in a VCT can fall as well as rise and you may not get back the full amount invested.
Most investors view their VCT as a long-term investment.
This assumes, however, that the fund is performing and that they are happy with the level of tax-free income they are receiving from the fund.
If it isn’t performing, you want to make sure that you have maximum flexibility by being able to sell your shares. As selling VCT shares through the stock market can be difficult, a number of VCTs have share buyback schemes, whereby the manager will arrange to re-purchase your shares, usually at no more than a 10% discount to the net asset value.
As with any fund, it is important that you focus on the trackrecord and the experience of the fund manager. A reassuringpoint in respect of VCTs is that they are publicly quotedcompanies with an independent board of directors.
Last tax year, more than £250 million was raised byapproximately 20 VCT fund management companies. Ofthis money, more than £50 million was raised by Octopus.
Conversely, a number of managers in the market failed to raise£10 million and two years ago, some managers were forced towithdraw their offerings. For investors in VCTs which only raisea small amount of money (less than £15 million), there are anumber of potential disadvantages, including higher chargesand less portfolio diversification.
Another difference between a VCT and a traditional fund is thata VCT will invest gradually over time. Unlike a unit trust whichtypically would be fully invested at all times, a VCT can spend upto three years investing clients’ capital. This means that for atleast the first year and a half of the VCT’s life, the majority ofthe fund will remain largely in cash, earning interest on behalfof investors.
