Venture Capital Trusts are higher risk investments
Venture Capital Trusts (VCTs) are considered to be specialist, high-risk investments as they invest in small companies with shares that are illiquid and can be hard to sell. As you must remain invested for at least five years to keep the tax credit, VCT shares are also long-term investments. Because of this, they should only form a small part of your overall investment portfolio.
Share values and income from them may go down as well as up and you may not get back the amount originally invested. 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.
Venture Capital Trusts invest in a variety of small and growing companies, including unquoted companies and those listed on AIM (the London Stock Exchange’s growth market). Shares in these companies can be illiquid – they may be difficult for the VCT to eventually sell.
New investments made by VCTs must be made into companies that are no more than seven years from making their first commercial sale (or 10 years for ‘knowledge intensive’ companies). Investments in younger companies should be considered much higher risk than investing in businesses with long trading track records and established revenue sources. They are only suitable for UK resident taxpayers.
VCTs are designed as long-term investments. If you buy VCT shares in a new issue you need to hold them for at least five years to keep your 30% income tax credit – otherwise you will have to pay it back. Investors who cannot remain invested for at least five years should therefore not invest in a VCT. Tax levels and reliefs may change, and the availability of tax reliefs will depend on individual circumstances.
Venture Capital Trusts are listed on the London Stock Exchange, but as there is very little trading on the secondary market all VCT shares trade at discounts to their net asset values. In the past these discounts were often very high, but now most VCTs have control mechanisms in place. They usually aim to keep discounts at no more than 10% to net asset value, but a number of VCTs now target a 5% discount. You will find our comments on each VCT’s discount policy in our fund factsheets.
Rather than dealing for yourself online, when it comes to selling VCT shares it is important to go through a stockbroking firm like Bestinvest. They will contact a market maker on your behalf and arrange for the shares to be purchased through a buyback. If you trade VCT shares electronically you may end up receiving a price at a large discount to the net asset value.
VCTs should be regarded as higher risk investments. VCTs are only suitable for UK resident taxpayers who can tolerate higher risk and have a time horizon of greater than five years. Historical or current yields should not be considered a reliable indicator of future returns, which cannot be guaranteed.
We can give you more information about the risks of investing in Venture Capital Trusts: