Trust a fledgling-based fund

By TOBY WALNE, CHIEF MONEY REPORTER
Updated:

 

A growing band of canny investors is challenging the notion that only the most swashbuckling of speculators should put money into venture capital trusts.

VCTs, companies listed on the stock market that invest in the shares of unlisted firms and in companies listed on the Alternative Investment Market, are generally viewed as suitable only for those prepared to gamble.

They are designed to encourage private punters to back small, early-stage enterprises and are therefore among the riskier investments. But a record number of VCTs are being launched ñ at least 16 between last month and next January ñ to meet growing demand.

Sharebuyers who have made money from the dotcom boom and other investments are attracted to generous tax rules governing VCTs that allow them to put off paying capital gains tax (CGT) on amounts above £7,200. VCTs also escape income tax and dividends tax.

To qualify for the tax breaks, the shares must be held for at least three years if bought after 6 April this year, and for five years if bought earlier.

Investors escape up to 40% CGT by transferring gains made within the previous 12 months into a VCT. They will not have to pay CGT until these shares are sold. They may claim a 20% income tax rebate on the amount invested, and share dividends are free of income tax.

Management consultant Gerry Jacobs, 70, of Reading, Berkshire, put money into a VCT called Advent 2 two years ago. 'I had a capital gains tax bill from some private investments that I wanted to put off paying and a VCT seemed the ideal solution,' he says.

'The main problem was knowing where to invest the money because VCTs can be risky. It is difficult to get reliable information about the firms, and advisers are not always well informed on this subject.'

Investors should have a long-term strategy. Some VCTs, like ordinary investment trusts, wind up after a time to give investors an opportunity to take profits, but not for at least seven years. Other VCTs stay open indefinitely.

Minimum investment is typically £3,000, and to get the full benefit of the tax breaks, investors must swoop when the shares are issued. They should also be aware that they face stiff management charges, typically an initial 5% followed by 3.5% a year.

Jason Hollands, deputy managing director of independent financial adviser Best Investment in London, believes in planning ahead to avoid CGT rather than waiting until the end of the financial year. He says: 'Last year, partly because of big gains from high-tech investments, a lot of people were stung for the first time with capital gains tax bills, which they could have avoided by buying a VCT.

'But VCTs are inflexible and funds have to be tied up for at least three years for the full tax breaks to be claimed. VCTs are not as high-risk as one might imagine if the money is kept invested for several years.'

The performance of VCTs varied widely over the year to September 25, from falls of 7% to rises of 73%. VCT rules insist that fund managers invest 70% of the money in unquoted companies within three years of the initial fundraising. There are no restrictions on the remaining 30%, though many VCTs put it in fixed-interest investments to reduce risk.

Martin Churchill, director of research at VCT specialist publication Tax Shelter Report, warns: 'The tax breaks are the last factors to consider when investing in a VCT. They are the icing on the cake. When picking a VCT, investors should first look at the sectors and companies it invests in, the fund manager's track record, the running costs and the fees.'

Churchill adds: 'Don't wait for the end of the tax year to invest in a VCT because you may find there are no issues still open. Issues are on a first come, first served basis.'

• For a free information pack on VCTs call Allenbridge Group on 0800 339999 or visit www.taxshelter-report.co.uk

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