How VCTs work
On this page you'll find a brief introduction to Venture Capital Trusts as well as links to some further resources and websites you may find helpful.
Venture Capital Trusts
Venture Capital Trusts are investment vehicles: people invest money to own a proportion (through shares) of the Trust, and a fund manager then invests the money raised into companies with the aim of making returns for the shareholders.
Shore Capital launched its first Venture Capital Trust, the Puma VCT, in 2005. We don’t want to boast, but we do want to share an important fact with you: for each year we’ve launched a Puma VCT, we are top of the peer group for total return to investors. So when it comes to VCTs, we do like to think that we know what we’re talking about.
About VCTs – how do these things work?
Venture Capital Trusts have been around since 1996 and have raised over £4 billion. They are designed to be a tax-efficient way to invest into companies, are similar in form to investment trusts and are quoted on the London Stock Exchange.
When you invest up to £200,000 into a VCT, you get 30% of that amount back from the government as a rebate of the income tax you’ve paid during that tax year (and so this amount is limited to the amount of income tax you’ve actually paid).
So imagine you’ve paid £30,000 tax in a given tax year. And you then invest £100,000 into a VCT. You’ll then get £30,000 back from the government, meaning that you have around £95,000 of assets (after launch costs) for a net cost to you of only £70,000.
And what’s more, any gains and dividends paid out by your VCT are tax fee, for the full life of the trust.
So far so good, what’s the catch?
Again some facts. Investors must keep the VCT holdings for a minimum of five years to retain their tax benefits, and so VCTs require at least a medium term investment horizon. Because of this, there’s not much trading of VCT shares themselves (not much “liquidity” as that’s known), so exiting a VCT before it’s wound up can be difficult, and may require shares to be sold at a substantial discount to their book value.
A clear understanding of the risks associated with VCTs is essential before investing, and your independent financial adviser will help you with this.
So who manages these VCTs and what do they invest into?
There are many fund managers in the UK who run VCTs, investing through a wide variety of specialist and non-specialist strategies. The rules governing the management of the Trusts are the same for all though: there are limitations on the size of companies that the Trusts can invest into, and there are limitations on what those companies do.
Instead of investing in the equity of unquoted companies like many of our peers, in managing the Puma VCTs we typically support our target companies by extending secured loans to them, a bit like advancing a mortgage.
This strategy provides some security for our shareholders, which equity based investments do not provide. The interest charged on the loans also typically generates an annual yield, allowing us to pay out dividends – and again, these are tax free to our investors.
After five years, we ask the shareholders in each Puma VCT to vote on winding-up the Trust. Upon a successful vote, we then put the VCT into member’s voluntary liquidation, and return the remaining proceeds to shareholders as part of the liquidation process.
We hope you have found this a useful introduction to Venture Capital Trusts. Further information can be found elsewhere on our website as well as on the relevant sections of the HMRC website and AIC websites, as well as further details at Investegate and the FSA for regulatory information.
But before investing, please do consider all the risks and consult with your independent financial adviser.
Shore Capital Stockbrokers Limited is a member of the London Stock Exchange and is authorised and regulated by the Financial Services Authority.
Shore Capital Limited and Shore Capital and Corporate Limited are authorised and regulated by the Financial Services Authority.
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