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You've
built up a well-balanced investment portfolio and
taken advantage of fully funding your pension and
tax-efficient investment allowances. Now where can
you turn to accumulate further wealth? Well, depending
on your attitude towards risk for reward, one option
is a Venture Capital Trust (VCT).
VCTs have
the advantage of allowing you to spread your investment
– and therefore risk – across a number
of companies, rather than putting all your money into
just one company. They also offer valuable tax benefits
to the right investor.
Unquoted
or AIM?
VCTs provide generous tax incentives to encourage
individuals to invest in smaller, unlisted companies
on the Alternative Investment Market (AIM).
Investment
rules
VCTs are restricted to the smaller end of the
market – the upper limit on the size of company
they may invest in is £16m immediately after investment
and the maximum they can invest in them is £1m. VCTs
must have at least 70% of their funds invested in
qualifying companies within three years of launch.
Charges
The initial charge is generally 5% and the annual
charge is around 3.5%. There are also performance-related
management incentives.
The choice
is yours
When investing your money through VCTs, you can select
from a wide range of companies. Fund raisings or new
issues are available all the time.
Minimum VCT
investments are usually £3,000 or £5,000. New VCTs
have a maximum of three years from launch to have
at least 70% of their funds invested in qualifying
companies. You need to invest for at least three years
to keep all the tax reliefs, but this is subject to
ratification in the Finance Act.
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Diversify
venture capital investment risk
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* Venture capital should be regarded as a long-term
investment.
* Venture capital can
be a risky area. To reduce risk you should choose
a venture capital trust (VCT) holding a wide
range of investments. For greater diversification,
consider investing in more than one fund.
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* Investing for at least three years is essential.
You have to invest for that period to qualify
for the tax breaks and, although VCTs are listed
on the Stock Exchange, there is very little trade
in second-hand shares – usually only when
a holder dies. So shares may not reflect the net
asset value of the company. |
* Liquidity can be a problem even after three
years, particularly with smaller trusts.
* Don't commit too large
a proportion of your money, however tempting
the tax reliefs of VCTs might be.
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VCT
tax advantages
* 20%
upfront income tax relief in the tax year of
issue on subscriptions for new ordinary shares
in a VCT. The investor needs an income tax liability
to utilise this relief.
* Up to 40% capital gains tax deferral on capital
gains reinvested. When the VCT shares are eventually
disposed of, the original net gain (after indexation
allowances) is taxed at the rate of tax then
current.
* Tax-free dividends on both income and capital
profits.
* No CGT on disposals.
Reliefs
are available for UK residents aged 18 or over
and for subscriptions of up to £100,000 per
tax year.
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