What are the risks of VCTs?
The value of VCTs, and any dividends derived from them, can fall to zero.
Venture Capital Trusts (VCTs) are specialist, high-risk investments as they invest in small companies that are more likely to fail.
As you must remain invested for at least five years to keep the tax credit, VCT shares are also long-term investments.
VCTs should only be considered by experienced investors once other financial planning solutions have been fully explored and should only form a small part of your portfolio.
You should only subscribe for new VCT shares based on the relevant prospectus and must carefully consider the risk warnings contained in that prospectus.
Venture Capital Trusts invest in a variety of small and growing companies, including unquoted companies and those listed on AIM (the London Stock Exchange’s growth market). It may take 7 to 10 years for the companies to become successful and be sold by the VCT.
New investments made by VCTs must be made into companies that are no more than seven years from making their first commercial sale (or 10 years for ‘knowledge intensive’ companies). Investments in younger companies should be considered much higher risk than investing in businesses with long trading track records and established revenue sources. They are designed for UK resident taxpayers.
They are long-term investments
VCTs are designed as long-term investments. If you buy VCT shares in a new issue you need to hold them for at least five years to keep your 30% income tax credit – otherwise you will have to pay it back. Investors who cannot remain invested for at least five years should therefore not invest in a VCT.
Their tax treatment depends on the individual circumstances of each individual and may be subject to change in the future.
VCTs can trade at a discount
Venture Capital Trusts are listed on the London Stock Exchange, but as there is little trading on the secondary market all VCT shares trade at discounts to their net asset values. In the past these discounts were often high, but now most VCTs have control mechanisms in place. They usually aim to keep discounts at no more than 5% to net asset value.
Selling your VCT shares
Rather than dealing for yourself online, when it comes to selling VCT shares it is important to go through a stockbroking firm. They will contact a market maker on your behalf and arrange for the shares to be purchased through a buyback. If you trade VCT shares electronically you may end up receiving a price at a large discount to the net asset value.
