I am a 35-year-old bach-elor who has recently inherited just under
£150,000. I am in a professional occupation and have recently
started to achieve my full earnings potential, which means that I now
have surplus monthly income. I have used the inheritance to repay my
mortgage and upgrade my car. This has left me with just under
£20,000 in a high-interest instant-access building society
account. I have no other savings, investments or debts. I want to
invest the £20,000 in a more appropriate investment environment
utilising my Isa allowances where appropriate. I am interested in
very speculative investment opportunities such as smaller com-panies
funds, where I appreciate that the potential for gains is good but
that the potential for losses is high. How would you advise me to
The investment areas you are considering can be very volatile and
should be considered long term. If the need arises to access your
investment in the early years, it could prove very detrimental and,
therefore, any investment in this environment should be capital that
you can afford to leave well alone and, more important, that you can
afford to lose.
The first thing I would advise is not to invest all your capital.
Everyone should retain a portion of their funds in an easy access
deposit account to cover unforeseen eventualities and short-term
spending requirements. The amount that should be retained on deposit
varies from person to person but I would suggest that £5,000 to
£10,000 be considered.
There are a number of smaller companies funds which could be suitable
for the balance of your capital. Like many investors, you may believe
that utilising the full £7,000 Isa allowance in the current tax
year is the most appropriate step. It goes without saying that the
less tax you have to pay on your investments, the faster they will
accumulate. Tax avoidance measures are important, especially for
Gains will be tax-free without utilising your annual capital gains
tax exemption, dividend income will be free of income tax and the tax
credit on any dividends received before April 2004 can be reclaimed.
However, given your investment objectives and risk profile, I feel
that there is an even better alternative.
Venture capital trusts seem to be a very well kept secret but would
meet your objectives and be more tax-efficient than an investment
utilising your stocks and shares Isa allowance. VCTs offer
individuals almost identical tax advantages as an Isa (no capital
gains tax on eventual sale and no income tax on dividends) but have
significant additional advantages. The most important from your
perspective is the income tax relief on initial investment. For every
£1,000 you invest in a VCT, the Inland Revenue will reduce your
income tax liability by £200. This is only repayable if you
encash the investment in the first three years.
A VCT can retain a portion of its funds in low-risk investments but
ultimately the majority of it will be invested in unquoted or
Aim-quoted companies that have prospects for significant growth. In
theory, the degree of risk within a VCT which only invests in
Aim-listed securities is lower as there is a formalised market for
the underlying company shares. An Aim-based VCT managed by a
reputable manager seems to offer an extremely tax-efficient way for
you to expose the desired portion of your capital to a portfolio of
investments in smaller companies.
My preferred Aim-based VCT offering at present is Phoenix VCT from
Octopus Asset Management. It will invest in a diversified portfolio
of established Aim-listed UK smaller companies and will be managed by
some of the most successful smaller company fund managers in the UK.
Your investment will leave your Isa allowance intact and it would be
prudent to transfer £3,000 of your retained deposit capital into
a mini cash Isa for the current and possibly the next tax year.
Competitive interest rates are available, access need not be lost but
no tax will be payable on the income.
Assuming the interest rate achieved is the same as the non-Isa
deposit account, the effect of the tax relief to a higher-rate
taxpayer is an increase of 66.66 per cent on the after-tax income
received on this portion of deposit capital.