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Why do investors buy VCTs?

Richard Troue highlights some important reasons why sophisticated investors invest in VCTs.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

  • VCTs typically invest in very small companies which are looking for further investment to help develop their business.
  • To encourage investment in this crucial and higher risk area, the government offers investors generous tax benefits.
  • Below we delve into some of the reasons why sophisticated investors invest in VCTs.

VCTs were created over 20 years ago. They allow adventurous investors to support some of the UK’s smallest businesses by providing the investment needed to grow and develop. To encourage investment in this crucial and higher risk area, the government offers investors generous tax benefits, including 30% income tax relief when you invest, tax-free dividends and tax-free capital growth.

VCTs can be an invaluable financial planning tool, both leading up to and in retirement. After ISA and pension allowances have been used, VCTs could be the next port of call for tax-efficient investing. Remember tax rules can change and benefits depend on individual circumstances.

Find out more about VCTs

Income

Tax-free dividends are the primary source of returns for VCT investors and in the current low interest rate environment dividends continue to look attractive, with yields in the region of 5% on offer. Please remember dividends are variable and not guaranteed, and unlike the security offered by cash, the value of VCTs will fluctuate and investors could lose money.

There is virtually no pressure on the Bank of England to raise interest rates while the economy remains stable and inflationary pressures are low. At present we think an interest rate rise in 2016 is unlikely and we remain positive on the ability of VCTs to generate an attractive income.

Growth

The outlook for UK smaller businesses looks set to remain buoyant in 2016. Falling energy prices have reduced costs for consumers and businesses in the form of lower fuel and material costs, boosting spending power and profitability respectively. The effect is similar to a tax cut and it could benefit the types of small business in which VCTs invest.

The rules governing VCTs were recently amended to reaffirm the requirement for VCTs to focus on smaller businesses at an earlier stage of their development. This ensures VCTs invest in the types of business it was always intended they should help. However, younger companies don’t tend to generate the same profits and cash flows (from which dividends can be paid) as more mature companies and are more prone to failure. Less consistent returns from underlying companies could mean less consistent returns from VCTs.

It will take time to see which managers adapt best, but in the short term those who have always focused on backing very young companies should be best-placed to adapt. Among the VCTs currently available we feel the Albion, Downing ONE, Octopus Titan, Pembroke and ProVen offers fall into this category.

View VCTs currently available for investment

Investing in VCTs

Potential investors should remember VCTs are higher-risk investments aimed at sophisticated investors with large, well-diversified portfolios. There is further information on VCTs on our website, alongside prospectuses & application forms for current VCT offers; and exclusive VCT research factsheets. This article is not personal advice, so if you are at all unsure of the suitability of an investment for your circumstances please seek advice.

Find out more about VCTs

We expect some of the more popular VCT offers to close early so if you are interested we recommend you act promptly.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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