How to support UK start-ups and save on tax
As far as tax efficient investments go, Venture Capital Trusts or VCTs, have a lot to offer.
VCTs allow investors to support and benefit from growth in some of the UK’s most dynamic, entrepreneurial and high growth companies.
In return for the risk taken by investing in such companies, investors receive significant tax breaks.
Investing in a VCT attracts tax relief of 30%, so every £100 investment effectively only costs £70. Dividends and gains are also tax-free as long as the shares are held for the obligatory minimum 5-year period.
Changes to the VCT regime in recent months has caused some uncertainty for investors.
The Government is in the process of relaxing the rules regarding the size of companies in which VCTs may invest.
Where VCTs could only invest in companies with assets up to £7m and a maximum of 50 employees, now the limit is £15m and 250 maximum employees. The amount that can be invested has also increased to £5m.
However, the tax authorities are yet to clarify exactly how the new rules will be applied. This has depressed the amount of investments going into VCTs this year.
In the current environment where banks are still reluctant to lend, VCTs offer promising companies a very viable alternative funding opportunity.
For investors, they offer a chance to tap into exciting new growth opportunities – all underpinned by some very significant tax breaks and the potential for some serious returns.
But remember, VCTs are regarded as high risk investments and only UK resident taxpayers are eligible.
The best way to mitigate risk in VCT investments is to select a specialist fund management team which knows its sector inside out.
Adrian Lowcock of Hargreaves Lansdown offers his last minute ideas for VCTs in the current market:
Mobeus VCT Linked Offer
Mobeus is a generalist VCT and favours management buyouts. Mobeus VCTs are managed by a strong, experienced team with mature dividend-paying portfolios. The aim of each VCT is to provide regular and growing dividends through a combination of income and capital growth. The annual tax free dividend target is 4p per share for each fund.
British Smaller Companies VCT & VCT 2
Investors can access an existing diverse portfolio of growth orientated companies, some of which may be quite small compared to those invested in by other VCTs. The primary focus is on management buy-outs (MBOs) and investment in unquoted businesses. They avoid companies with high levels of debt. The aim of these funds is to provide attractive total returns and consist¬ent tax free dividends of 5p for British Smaller Companies VCT and 4p for British Smaller Companies VCT2.
Hargreave Hale AIM VCT 1 & 2
Manager Giles Hargreaves is considered to be one of the best small and micro-cap fund managers around. This VCT allows investors to access his expertise inside a tax efficient VCT wrapper. The VCTs provide capital to smaller companies listed on AIM so they can expand their businesses. The VCTs target a tax free dividend of 5% of the net asset value of the funds, though the natu¬ral yield of the portfolio is around 2% so much of this will come from capital.
Puma VCT 9
Limited Life VCTs, such as Puma VCT 9, often invest in one sector and are normally designed to be lower risk and lower return than other VCTs. The VCT managers invest in businesses which are asset backed and have a good quality management team. Puma VCT 9 aims to protect capital and pay tax free dividends of up to 6p per annum from the second year before looking to wind up and distribute the remaining assets in the sixth year. Shore Capital, managers of the Puma 9, are experienced in this style of investment.