Venture Capital Trusts (VCTs) have turned out to be one of the success stories of the UK's investment sector, with around sixty VCT's raising nearly £1bn of funds for start-ups and the SME sector. This is the time of year - in the months before the end of the tax year - when new VCTs tend to be launched, and already seven new VCTs have appeared, three general ones and four Trusts for AIM (Alternative Investment Market) companies.
For a full list of all the VCTs launched since 1995, when the scheme began, see the site of the British Venture Capital Association at http://www.bvca.co.uk/publications/vctrusts.html.
The seven new VCTs are as follows: AIM VCT2 from Friends Ivory & Sime, the Close AIM VCT, Downing Classic 3 (high-tech focus), the Matrix e-ventures VCT, Northern AIM, Quester 4 (general), and TriVest (general).
Venture Capital Trusts (VCTs) were introduced in the 1995 Finance Act to encourage investments into the small and medium company sector. A VCT is a quoted vehicle similar to an investment trust, with an active manager and a spread of investments.
Investors receive an income tax deduction of 20% of an investment up to a maximum investment per tax year of £100,000. In addition, the whole amount of the investment can be set against a capital gain. Dividends are not subject to further tax in the hands of the investor and capital gains made on the VCT investment are tax free. Investors must hold the VCT for at least five years to avoid losing the tax reliefs.
Costs are usually 5% on issue, running costs of about 3.5% per annum and some form of management incentive. Exit is via selling the shares.
A VCT must invest at least 70% of its fund within 3 years. At least 70% of the total fund must be invested in unquoted companies trading mainly in the UK (AIM listings are included in this percentage). Certain asset-backed trades are banned and the company receiving the investment cannot have net assets of more than £15 million. Investments in companies listed on the Alternative Investment Market are allowed. 30% of these investments must be in ordinary shares but the balance can be in loans or preference shares. The 30% balance of the fund can be in low risk fixed interest securities.
The market in VCT shares has in fact been very thin (the 5-year lock-out period for the first VCTs is only now expiring and it would be very silly to sell within the period other than on death or bankruptcy). It's not clear what sort of discount to net asset value the VCTs will suffer - investment funds typically sell at substantial discounts, but VCTs may be sexier. At all events, holders will probably be well advised to wait until the seven-year stage, when VCTs are allowed to wind themselves up if they choose.
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