Trusts Hope Investors Are Ready to Be Thrilled ; Simon Hildrey Reports on the Revival of Venture Capital Funds
Hildrey, Simon, The Independent on Sunday (London, England)
Although many people will view Chancellor Gordon Brown as an unlikely saviour for investors, he might just have rescued venture capital trusts (VCTs) from terminal decline.
Because, on 5 April this year, just as VCTs had become the forgotten asset class of investments, the Government changed the tax benefits.
Under the new rules, if you invest in a VCT before 5 April 2006, you will receive a rebate of up to 40 per cent. For example, put in pounds 10,000 and you get pounds 4,000 back from the taxman. You don't have to be a higher- rate taxpayer to reclaim this 40 per cent.
However, the sum is restricted to the amount of income tax you pay: if you invest pounds 200,000 each tax year but have paid only pounds 5,000 to the Inland Revenue, you will receive only a pounds 5,000 rebate.
All gains and dividends in the trusts are tax-free but you must hold your investment for at least three years to enjoy these benefits.
VCT managers hope the tax changes will herald a return of the good old days and encourage a significant increase in investment. More than 15 launches of new VCTs have already been announced on the back of this expectation. The managers are hoping that at least pounds 250m will be raised, and possibly as much as pounds 500m.
The peak demand for VCTs came in the 2000-01 tax year, when pounds 440m was invested in them. In 2001-02 this fell sharply to pounds 140m, following the decline in the stock market, and then there was a still steeper drop to pounds 50m in 2002-03. There was a slight recovery to pounds 59m in 2003-04 but that is still just 13 per cent of the amount attracted three years ago.
VCTs are marketed for their tax benefits but shouldn't be chosen solely for this reason. They are closed-ended vehicles listed on the London Stock Exchange and invest in start-up ventures, unquoted companies and shares listed on the Alternative Investment Market (AIM), with capitalisations of less than pounds 15m. This makes them higher-risk investments than blue-chip FTSE 100 stocks, and there is less liquidity.
When investing in a VCT, you need to select from one of three categories: generalist, AIM or specialist. All can offer attractive long-term returns, but performance varies widely. For example, the online publication Tax Efficient Review says that of the generalist and specialist VCTs launched during 1997-98 and 1998-99, Foresight Technology has delivered a return of 18. …