I am a higher-rate taxpayer who has maximised all the tax-efficient investments that I am aware of. I have previously stayed away from venture capital trusts due to the volatility in the stockmarkets. Should I now consider them as I am willing to adopt a higher risk/reward strategy for part of my portfolio?
Venture capital trusts invest in the shares of unquoted trading companies or fledgling companies. The range of company activities can be as far-reaching as technology to homebuilding.
Some investment companies specialise in offering packaged venture capital trusts, which could match your investment requirements.
An investor in the shares of a VCT is currently exempt from tax on dividends – although the tax credits are not repayable – and on any capital gains arising from disposal of the shares. Income tax relief at 20 per cent is available on subscriptions for VCT shares, up to £100,000 per tax year, as long as the shares are held for three years or longer. Capital gains of up to £100,000 per tax year can be deferred into VCT investments.
My advice is never to assume that you will exit the VCT in three years time. A longer investment horizon should be adopted, certainly for five years or even longer. However, knowing the tax benefits are secured after three years helps to provide effective tax planning within your whole financial plan.
To date, the average subscription to a VCT has been £25,000 but over the last three years there has been a sharp reduction in funds invested in VCTs as a result of the global downturn in equity markets. The main three themes that dominate world stockmarkets currently are the prospects for inflation, economic growth and whether or not current stockmarket valuations are justified set against the current inflationary and economic growth background.
Estimates show that a total of around £450m was raised by the venture capital industry in 2000/01, falling to just less than £50m in 2003/04.
As a result, the recent Budget introduced even more advantageous tax incentives to persuade people like you to reconsider VCTs. It is expected that these changes, which are effective from April 6, 2004, will increase the attractiveness of such schemes. The measures include:
An additional temporary improvement to income tax relief for a period of two years. Income tax relief increases from 20 to 40 per cent.
The upper limit for eligibility for income tax relief will be increased from £100,000 to £200,000 in any single tax year.
Changes are to be introduced to the operation of schemes to introduce greater flexibility and better reflect the commercial realities of today.
However, the Chancellor also announced that the ability to defer capital gains by investing in VCT shares will be withdrawn. You have mentioned that this is not a concern to you but those investors who are looking to shelter gains from a profitable investment or business sale have lost an important tax shelter.
The tax relief incentive is attractive as it means that or every £1 invested, the cost to you will be 60p. For a list of around 70 current VCTs, look at http://www.trustnet.com/vct/ You could also consider investing in Enterprise Investment Schemes, which allow new equity investment in qualifying unquoted trading companies, including Aim-listed companies. While VCTs spread your investment between a number of companies, thereby lowering the risk, an EIS tends to invest in individual companies. In this area, there are also recently announced improvements.
Income tax relief of 20 per cent is currently available for EIS investments of up to £150,000 in each tax year. Capital gains tax exemption is given for shares held for three years or longer and unlimited capital gains may be deferred by reinvestment in EIS shares.
From April 6, 2004, the annual investment limit for eligibility for 20 per cent tax relief will be increased to £200,000.
I can advise you on how to build a structured investment portfolio. There are four main asset classes – cash, fixed-interest investments, equities and property. These are the four core investments from which all other investment vehicles are derived, including VCTs and EISs.
There are many ways to gain access to the main asset classes. However, using the tax-efficiency of a VCT, EIS or a pension fund should not deter from the fact that your overall holdings should match your risk profile and investment outlook.