Find out about VCTs...
VCTs are quoted limited companies whose purpose is to invest shareholders’ funds in smaller unquoted trading companies (including AIM listed stocks) – with potential for growth and to eventually be floated on the stock market, sold, or refinanced – with a view to making a profit in a tax-efficient way.
VCTs are run by investment managers, and raise their funds from private investors. Money raised from individual investors is pooled in order to acquire a portfolio of different investments and to spread the risk. The VCT shares are quoted on the London Stock Exchange.
Managers must invest at least 70% of new proceeds within three years, and there are several rules surrounding the companies which VCTs are allowed to invest in, in order to protect its investors. To ensure that the VCTs are only investing in genuinely small enterprises, at the time of the VCT issue, the gross assets of the company must be less than £15million. The company must have no more than 250 full-time employees and the company’s shares should not be listed on a recognised stock exchange and certain trades are specifically excluded, such as hotels, nursing homes and banking.
VCTs offer a number of tax benefits, including 30% Income Tax relief on new subscriptions if the shares are held for at least five years.
However, there are also a number of important disadvantages, namely, costs are relatively high, VCT shares are illiquid and almost invariably trade at a wide discount to the underlying Net Asset Value, and investment risks are usually high.
In our view, VCTs should only be considered by experienced investors who are in a financial position to take a longer term view and tolerate a higher level of risk.
These VCTs typically invest in unquoted companies in the hope of making a profit when the company is sold or floated.