Buy NOW While Stocks
Last!- Spring 2006
By Jon Cobb, Trinity Wealth Management
I'm
talking of course of Venture Capital Trusts (VCTs) which until
the end of this tax year are offering a very generous 40% Income
tax relief on contributions. On top of this, the dividend income
paid out on a VCT is tax free!
Sadly as is always the case,
these will be miss-sold to the masses, and for some it will
all end in tears. However, like football teams, there are good
ones and bad ones, and after doing a little homework it is possible
to pick out the potential winners. Lets be honest, if you knew
a little about soccer, you wouldn't be unhappy if you drew Brazil
in the office World cup sweepstakes, whilst the rugby buff who
works in HR will probably be in ignorant bliss of the dud he
has pulled in getting Iran (14/1 if you're interested)
But as they say, there's no such thing as a free
lunch, and there has to be a risk trade off to earn this 40%
income tax relief and tax free dividend income stream.
Basically, the risks are
as follows:
- Liquidity
- On top of the three years which you have to hold the investment
in order to keep the tax relief, these investments are 'closed
end trusts' which mean there are a specific number of shares.
If you want to sell them, you have to find a buyer! If they've
per-formed poorly, and everyone's looking to sell, it could
take you quite a while.
- Fund
size - although over £500m was raised by
approximately 40 VCT fund managers last year, over twenty
managers failed to raise in excess of £10m. In fact
six of these had to withdraw their offering and return the
money to their disgruntled investors.
- Unquoted
companies - VCTs were introduced by the Tory Government
in 1995 to encourage individuals to invest in UK Smaller Companies.
These are deemed to be companies listed on AIM or OFEX or
unquoted companies. A VCT is only allowed to make an investment
of £1m maximum into any one company, and that company
can not have a value of more than £15m. These types
of companies (even collectively) would be deemed above average
risk.
- Bandwagon
jumpers! The marketing
departments of some Investment houses have spotted a lucrative
niche and are looking to relieve you of your buck. For fear
of repeating myself, there will be winners and losers. An
existing track record in this highly specialised area would
be a good place to start in the sifting process.
So why would you buy a VCT?
- Well, the 40% tax relief
certainly is compelling. (However, in isolation this is insufficient
reason (Never let the tax tail wag the dog!)
- An additional source of
tax free (retirement) income. (VCTs are more flexible than
pensions, as you are not locked in, and indeed the full value
can be passed to a spouse on first death)
- As part of a larger portfolio,
a VCT offers an attractive tax efficient exposure to UK Smaller
companies.
- As part of an Equity / Property
/ Fixed interest portfolio, the addition of a VCT can lower
the risk as VCTs typically do not follow the cycles of mainstream
stock markets.
Of course after 6th April 2006, VCTs become a totally
different proposition. Ok, 30% income tax relief is still attractive,
and one can live with the extension to five years for the length
required to keep the tax relief, but it is the reduction to
£7.5m as the maximum value of a company that can be invested
in which takes the risk of a VCT to a higher level.
Like I said, buy now whilst stocks last! But be
quick!
If you would like advice on any area of investment
management, do call Jon, he would be happy to discuss your requirements
with you.
Jon Cobb, Trinity Wealth Management
- www.trinitywealthmanagement.co.uk
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