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Sound approach to VCT from Octopus

Octopus Investments has created a venture capital trust that aims to provide investors with a high level of capital security. It will do this by investing in unquoted UK companies that have contracts in place from financially sound customers or operate in sectors where the revenue generated is predictable.

Octopus is aiming to raise up to £50m for the VCT, which will proceed if it raises at least £1. The company says it found advisers wanted a VCT that addressed the lack of liquidity that can be a problem for VCTs. The secure VCT is a response to this feedback as it will provide a clear exit for investors to release their capital and any gains tax-free after five years. 

Octopus intends to wind up the investment in 2015 if shareholders approve and return capital to investors. The company says that by offering the exit opportunity after five years, they are able to target minimum return of 105p for each share.

As well as 30 per cent income tax relief, capital gains on the sale of shares and dividends are tax-free.

To align the investment manager’s interests with those of investors, the 2 per cent a year annual management charge will be rolled up and will only be paid if investors receive the targeted minimum return of 105p. This means investors will receive a minimum return of 50 per cent on the net investment of 70p per share, after taking into account the 30 per cent upfront income tax relief, before Octopus receives a fee. A 20 per cent performance fee is also paid on returns above the 105p minimum.

The tax benefits of this VCT and its investment strategy, including the proposed exit, may reduce investment risk but small unquoted companies inevitably have higher risks in the trade off for higher potential growth.

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