Investing in smaller companies – with tax-benefits
In recent weeks the first new fundraising offers of the 2014/15 tax year have begun to appear in the Venture Capital Trust (VCT) market after the traditional lull in activity over the summer months. Over the next couple of months we expect to see a number of VCTs launch new offers, each of which will have only a limited amount of capacity available.
For those unfamiliar with VCTs, these are specialist investment companies which invest in portfolios of small UK enterprises that are either unquoted or are traded on the London Stock Exchange’s Alternative Investment Market (AIM). A wide range of companies have previously benefitted from VCT financing, ranging from clothing brands such as Crew Clothing and Fat Face to property website Zoopla, biotech firm Abcam and wine company Virgin Wines.
Investing in small companies inherently carries a high degree of risk, as it may be difficult to sell an investment if the company disappoints or the market environment is tough. To incentivise investors to help finance these companies the Government therefore provides VCTs with a number of tax benefits. These include a 30% Income Tax credit when investing a VCT new share issue (repayable if the investor sells the shares within five years), tax-free dividends and tax-free capital gains.
In the previous tax year, 2013/14, VCT fundraising reached the highest level in several years, with almost £400 million of new cash raised. At a time when yields on many traditional asset classes are low and the annual and lifetime pension allowances have been reduced, experienced investors with a high risk tolerance have shown increased interest in the combination of dividends and tax efficiency provided by VCTs.
While VCTs can be an attractive part of a portfolio for some investors, they are clearly not suitable for the broad market of investors. It is therefore important to carefully consider the pitfalls as well as the benefits before investing in them.
The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change. This article is not advice to invest or to use our services.
VCTs should be regarded as higher risk investments. They are only suitable for UK resident taxpayers who can tolerate higher risk and have a time horizon of greater than five years. Past performance is not an indication of future performance. Share values and income from them may go down as well as up and you may not get back the amount originally invested. Owing to the nature of their underlying assets, VCT's are highly illiquid. Investors should be aware that they may have difficulty, or be unable to realise their shares at levels close to that that reflect the value of the underlying assets. Tax levels and reliefs may change and the availability of tax reliefs will depend on individual circumstances. You should only subscribe for new VCT shares on the basis of the relevant prospectus and must carefully consider the risk warnings contained in that prospectus.