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What kind of returns can I expect?

It's a common misconception that because VCTs invest in smaller companies, the returns are likely to come in the form of capital growth.

In fact, the majority of returns are paid as tax-free dividends during the life of the VCT. Many VCT managers aim to generate yields in the region of 5% a year, which is equivalent to around 7% for a higher rate tax payer.

In order to achieve a steady flow of dividends, VCT managers often structure investments in the underlying companies in a way that emphasises income generation. They do this by providing a proportion of the investment as a loan with the remainder in shares. The repayments on the loan provide a regular income to the VCT while loans also rank ahead of equity in the event the business fails, making the deal less risky if the business has assets which can be sold.

The capital value of their investment should be a secondary concern for investors. We suggest holding VCTs for the long term in order to benefit from the tax-free dividends as the portfolio matures. VCTs must be held for a minimum of five years in order to retain the tax relief.

More information about VCTs

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