VCT guide

37 36 SUITABILITY SUITABILITY into account (if it isn’t withdrawn for some reason), and while it may be that, given time, the VCT will recoup any losses, clients should be comfortable taking on this level of risk with the funds they have allocated to VCT investing. Capacity for loss If a loss of the capital they have earmarked for VCT investment would have a materially detrimental effect on the client’s standard of living, then they should be advised against investing in VCT shares. Attitude to risk and capacity for loss should be assessed independently of each other. They measure the risk an individual is willing to take (attitude to risk) and the risk an individual can afford to take (capacity for loss). Attitude to risk is subjective and based on a client’s personal opinions. This differs to capacity for loss, which is objective in nature and based on fact. It is also worth remembering that CGT loss relief is not available should the shares be sold at a loss. Suitability Client Considerations Reduce or eliminate income tax liability up to £60,000 They have a requirement for tax-efficient investment for capital growth OBJECTIVES They have a requirement for tax-efficient investment with tax-free dividends They have surplus capital They are aware of the potential to lose all of the investment They are aware the reliefs could be withdrawn or clawed back CLIENT PROFILE No market for the shares Likely to trade at a discount to the NAV (true value) Five-year holding period to retain income tax relief although a five to ten- year holding period is more realistic Tax relief isn’t an excuse for high risk nature WARNINGS Typically, VCT managers will deploy an investor’s subscription across multiple companies. The target number varies by manager, but typically is between 30 and 60. It is also important to diversify a client’s VCT investments across different VCT fund managers and VCT offerings. There are varying methodologies for selecting potentially successful investments across managers and the objectives and strategies of investment offerings also vary. ”The main challenge is finding suitable investee companies which are less than seven years old and then meeting investors’ expectations of receiving dividends.” DAVID BROOKES, TAX PARTNER, BDO Liquidity and investment horizon Although VCTs are listed, their shares can suffer from low levels of liquidity. In addition, the minimum holding period to qualify for the upfront income tax relief is five years. Therefore VCT investments should be viewed on a five to ten year investment horizon. If clients anticipate an urgent need for their investment capital at any point sooner than this, they should be advised against investing in VCT shares. Knowledge and experience Investors (or their representatives) must have the capacity to understand the nature of VCTs and the associated risks. In general VCT investors will have experience of investing in a portfolio of more conventional retail investment products, and/or experience in business or a profession and, therefore, be in a position to make informed decisions about investing in VCTs. Portfolio balance and diversification It is highly unlikely that it would be appropriate for a client to concentrate their wealth in VCTs and, in the majority of cases, VCT investors will already have a substantial portfolio of conventional investments that meets the majority of their investment objectives. Investors should not be over-exposed to high risk investments, illiquid assets or unquoted securities. The risks and disadvantages of VCT shares should be more than offset by the rest of the portfolio.