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We think that this means that VCTs
should
be considered
for investors who are:
Finally, we can conclude that VCTs are
not
suitable
for:
And bearing in mind the likely
investment horizon and the higher risk
of VCTs, investors should be:
Prepared to hold their investment
for the long term (at least five years but
potentially much longer)
Comfortable with taking on a higher
level of risk than mainstream stock
market based investments
SUBJECT TO THE HIGHER (40%)
OR ADDITIONAL (45%) RATES OF
INCOME TAX
NON-TAXPAYERS (SINCE THE
INCOME TAX RELIEF AVAILABLE
ON NEW SHARE SUBSCRIPTIONS IS
AN IMPORTANT FEATURE)
THOSE WHO CANNOT STAY
INVESTED FOR A MINIMUM OF
FIVE YEARS (SINCE THEY WOULD
HAVE TO REPAY THE TAX RELIEF IF
SOLD EARLIER)
NOVICE INVESTORS
INVESTORS UNCOMFORTABLE
ABOUT TAKING A HIGHER LEVEL
OF RISK THAN MAINSTREAM
STOCK MARKET BASED
INVESTMENTS
ALREADY HOLDERS OF
PORTFOLIOS OF MAINSTREAM
INVESTMENTS, PROBABLY
WITHIN A PENSION
LIKELY TO BE ALREADY FULLY
UTILISING THEIR ANNUAL ISA
ALLOWANCE (£15,240 IN THE
2015/16 TAX YEAR)
CONTRIBUTING TO A PENSION
(IF WORKING)
“For the last 20 years, VCTs have provided financial advisers with an effective retirement
planning option for their clients”
Will Fraser-Allen, Albion Ventures
We’ve referred to “mainstream, stock
market based investments on the
left (and in several other places in the
report) because it gives us a reference
to compare VCTs to when it comes to
risk, but we admit this is a pretty vague
concept. Many stock market based
investments will be much more risky
than VCTs. We’re really using this term
as shorthand for the sorts of popular
equity based funds that invest in large
cap stocks in developed markets that will
form the backbone of most investors’
portfolios (and of course these funds
themselves are by no means risk-free).
And of course as higher risk investments
VCTs should only comprise a small
part of an investor’s’ total portfolio,
depending upon their attitude to risk
and level of wealth.
Much of this can be summed up in the
old adage “don’t let the tax tail wag
the investment dog”. Investors must
be comfortable with the risk they are
taking on, comfortable with the lack of
liquidity and they must have capacity
for loss before considering VCTs. The
tax reliefs don’t completely outweigh
these risks - they only make them more
tolerable. The point is that if investors
can tolerate these risks, there are
potentially big rewards for them if the
VCT performs well.
It’s also worth noting that FOS will closely
scrutinise the suitability of an investment
if they receive a complaint, even if the
tax was the primary basis for investing.
ACCUMULATION
Of course, as investments in smaller,
high-growth companies VCTs can form
part of an accumulation strategy. Tax-free
dividends and tax-free gains mean that, if
those dividends are reinvested, investors
are exposed to the compounding effect
tax-free. Compounding is the often the
key to a successful investment strategy
over the long term.
The impact of compounding tax-free
returns is quite startling: We used a
simplistic example, but if we assume a
yield of 6% (reinvested), annual growth