What are the risks?
Although some VCTs may be viewed as less speculative than
others, investors should remember that as a whole they are
exposed to substantially higher risks than mainstream equities.
VCTs should only be considered by sophisticated investors with significant investment portfolios who can take a long-term view and are comfortable with higher risks. The Financial Conduct Authority (FCA) suggests a sophisticated investor is somebody with an annual income in excess of £100,000 or investable assets of more than £250,000. Even then we feel VCTs should account for no more than 10% of a well-diversified portfolio.
VCTs are unlikely to be suitable for mainstream investors who may need access to their money in the short term, or for whom loss of the investment will cause financial hardship. This website does not constitute personal advice. We assume investors will make their own assessment of their expertise and the suitability of VCTs for their circumstances. Those with any doubts should seek expert advice.
They invest in smaller, sometimes fledgling, companies, some
of which could struggle or fail altogether, meaning losses for
investors. The VCT manager may also have trouble selling the
underlying investments. Investors should also be aware that
VCT shares are illiquid. This means they can be difficult to sell
(and buy) on the secondary market. Although shares are fully
listed on the London Stock Exchange, there might be only one
‘market maker’ for the shares, which means investors may have
difficulty selling at a price that fairly reflects the value of the
underlying holdings or, in extreme circumstances, at any price.
Often the VCT manager will offer to buy back investors’ shares at
a target discount to the value of the underlying holdings. Details
of any such buyback schemes can be found in the prospectus.
They are subject to conditions and not guaranteed.
A long-term horizon is essential with VCT investing. Aside from
‘limited life’ VCTs that look to wind up after a 5-7 year time
period, a ten-year time horizon is desirable. This is because
it takes time for expanding businesses to fully realise their
Investors should also be aware of risks affecting specific VCTs
and VCT types. For instance, a further issue arises from smaller
VCT funds who fail to raise sufficient money at launch. The
resulting portfolio of investments may be more concentrated
and it could increase the risks and charges. It is also worth
noting that all VCTs tend to have higher charges than other
types of fund and usually have performance fees.
As well as investment risks, it is possible that HMRC could
withdraw the tax status of the VCT if it fails to meet the
qualifying requirements. If this happens any tax rebate may
have to be repaid. Each VCT will issue a prospectus at launch
which gives details of specific risks and it should be read
thoroughly before considering an investment. If you are at all unsure of the suitability of VCTs for your circumstances, please seek personal advice.
Who invests in VCTs?
VCTs aren't for everyone.
They are high risk, and difficult to sell, meaning they are only really appropriate for investors who already have significant portfolios of more conventional investments. In short, you need to accept the risk of losses, and also take a very long-term view. We therefore feel that at most they should account for 5 to 10% of your equity portfolio.
Nevertheless, for those who can accept the risks, they can be a rewarding investment, especially for those who need their capital to generate an income – perhaps to supplement their pension in retirement. Indeed they can appeal to a variety of investors.
Some case studies are shown below. Remember that if you have any doubts as to whether VCTs are right for you, you should seek expert advice.
"I invest in VCTs primarily for the initial income tax breaks, to assist in sheltering my income from higher rate tax" - Mr Preece, Gwent
"VCTs enable me to build a tax free revenue stream to add to any pension income I will get when I retire" - Ms Dupras, Surrey
"I like to support young and start-up businesses as I think they are the future of our country. If I can do that and there are benefits for me I think that's a good thing." - Dr Clifford, Yorkshire