The New Year marks the real start of the 2012 VCT season that culminates at the end of the tax year on 5 April. While a number of great offers have already launched such as Puma 8 and Downing Planned Exit, several prominent houses such as Matrix and Baronsmead will be launching new offers this week or next. (Stay updated with VCT Email Alerts).
Some existing investors are also receiving offers of enhanced buybacks. These are proving increasingly popular with VCT mangers although they are not necessarily widely understood by investors; furthermore investors sometimes lose sight of the other options available.
Enhanced buybacks
The enhanced buyback works by capitalising on the fact that the lock-in period for VCT investors to retain their initial tax break is five years. So, any VCT where the shares were issued before today’s date in 2007 can now be sold tax-free, and investors selling shares need not worry about repaying their original tax rebate.
However, VCTs being traded on the London Stock Exchange like a regular share can rarely be sold via a stock broker at or indeed particularly close to the underlying value of their shares (that is, the value of the portfolio of investments owned by the VCT).
Instead, VCT shares tend to trade at a discount to their nominal value. Good funds will intervene to buy their own shares and keep this discount to a sensible level, usually no more than 10-15%. In contrast, some low quality VCT managers will make no efforts here and sometimes discounts in excess of 30% are seen – potentially negating the value of the initial tax break.
An enhanced buyback promises to purchase old shares at the underlying value of those shares or at a minimal discount of a few percent, with the proceeds automatically reinvested in new shares in that year’s offer, locking you in once again.
The investor benefits from a fresh 30% tax rebate on the value rolled over and the VCT gets to retain your money and earn their fees for another five years. Most investors tend to assume this is always the best option open to them at the end of the lock-on period, but this is not always the case. (See VCT FAQs).
But any old VCT can be recycled
Although we broadly admire enhanced buybacks for the ability to secure a fresh tax break on a holding that many people have often forgotten about, we are also quick to remind clients that they have alternatives.
Firstly, as long as you have held the VCT for five years, you could just take the hit on the discount by selling through the market and treat yourself to something nice with the money.
Alternatively, you could reinvest into one of the best VCT offers available that year and benefit from a new tax rebate at no additional cost to you.
Many VCT investors I speak to have a portfolio of VCT shares that are older than five years. They could potentially benefit to the tune of thousands of pounds via tax rebates with no additional outlay if they just recycled their old VCTs into new VCTs, and they can benefit from investing in a VCT that may prove to be a better investment over the next five years than their current scheme, even with an enhancement.
If you have VCT shares which you have held for five years or more, and wish to discuss the above options further, call us on: 020 7189 9999.
Attractive opportunities to save tax now
There are many legitimate ways in which you can minimise the impact of tax on your investments and income, and opportunities to claim tax relief in this tax year.
Our advisers are on hand to talk to you about VCTs and you can see details of the current launches on our website.
Useful links
Venture Capital Trusts and Enterprise Investment Schemes should be regarded as higher risk investments. They are only suitable for experienced investors who are UK resident for tax purposes, who can tolerate higher risk and have a time horizon greater than five years. This article should not be regarded as advice or a personal recommendation to invest.
If you have any doubts as to the suitability of VCTs or EISs, you should seek professional advice. Levels and bases of taxation can change; the availability of tax reliefs will depend upon individual circumstances, and the level of relief achievable cannot be guaranteed. Past performance should not be seen as an indication of future returns. The value of investments and the income derived from them can go down as well as up.