The taxman withdrew tax efficient status from a venture capital trust for the first time this week, after the trust breached the rules controlling how much a VCT can invest in a single company.
Oxford Technology VCT (OXT) invests in technology start-ups in the UK, and held shares in AIM index listed pharmaceutical company Scancell (SCLP). Scancell’s share price has recently bounced, meaning that it represented more than 15% of the VCT’s portfolio. This is the maximum limit set by HMRC.
HMRC has withdrawn VCT status from both Oxford Technology VCT Plc and Oxford Technology 3 VCT Plc.
Ian Sayers, director general of the Association of Investment Companies (AIC) said: “This is a very worrying time for investors in these two VCTs. We understand that both companies are going to appeal HMRC’s decision and so investors may want to speak to their financial advisers to understand the implications of these announcements.”
With the end of the tax year approaching now is a good time to introduce tax efficient investments such as VCTs and Enterprise Investment Schemes (EISs) into your investment portfolio.
VCTs and EISs fund start-ups and growing companies through private investors, but the nature of their holdings make them risky. Only experienced investors with well diversified portfolios should invest in VCTS – and allocate a minor portion of their investable wealth in these products. It is recommended that investors looking to invest tax efficiently first maximise their annual ISA and SIPP allowances.
What is a VCT?
As of April 6 VCT managers can invest in companies that have assets worth £15 million or less, where currently the investment threshold was £7 million or less. In order to spread the risk, a VCT will provide capital to several companies; softening the blow to the investors should one holding go under. The VCT manager is not allowed to allocate more than 15% of the entire portfolio to one company.
In order to compensate the investor for the risk of investing in unquoted assets, VCTs offer 30% income tax relief for the year they invest, and the capital growth is also tax free; any dividends payable are also tax-free.
You have to be invested for five years to qualify for the tax breaks, but as VCTs are listed vehicles you can sell your shares before maturity should you wish. Minimum investment is typically £5,000 with a maximum allowance of £200,000.
Unlike investing in a smaller companies fund, where share price growth makes up the majority of the return, VCTs mostly reward investors with tax-free dividends.
“These sophisticated investments are generally suitable for those with an annual income in excess of £100,000 or investable assets of more than £250,000,” said Richard Troue of stock broker Hargreaves Lansdown.
“The hands-on nature of VCT investing also means higher costs. In any circumstances VCTs should not exceed 10% of a portfolio.”
Morningstar analysts do not rate venture capital trusts
