Venture Capital Trusts are proving to be very popular amongst both start-ups and investors. The drying up of finance, low interest rates and uncertainty surrounding pensions are forcing businesses and investors to look at alternative methods of raising and growing capital. Although these investment trusts have been around since 1995, they are still growing in popularity – giving investors welcome tax breaks, and providing start-ups with a viable alternative to traditional lending institutions.
Buying Venture Capital Trust Shares Directly
A Venture Capital Trust (VCT) is a publicly traded company with shares listed on the stock exchange. These trusts are managed by investment specialists, who manage the initial sale of shares in the trust to investors from all demographics and economic groups. However, this might not be for everyone as capital invested in a VCT is a risk and investors must have capacity for loss and a long-medium term investment horizon. In many cases, these management services give investors the chance to invest in more than one fund, each with their own qualifying criteria, dividend arrangements, fund size and investment portfolio. Each trust will also have a minimum investment level, which is rarely lower than £3,000.
Venture capital firms will have prospectuses, which are legal offering documents detailing all the options, qualifying criteria. Understanding the requirements and implications associated with this type of investment should allow investors and their advisers to make the right decisions according to their tolerance for risk and their available capital.
Applications for shares are usually made via an application form, along with the payment. However, it is advisable to contact the trust manager directly in order to clarify which specific investments are included in the trust, information on any past successes and failures, historic and projected dividend payments and the various other details specific to that trust. Please also note that VCT tax benefits require that VCT shares are held for a minimum of 5 years.
Buying Shares on the Open Market
In effect, buying shares in trusts on the open market constitutes buying second-hand shares, and that means the income tax relief of 30 percent will not apply to the investment. However, investors buying shares on the stock market rather than through VCT offers will still be exempt from capital gains tax, liability on profit made from the sale of shares and the dividends associated with them. Some investors will look to the stock market if they missed out on the initial opportunity to invest, or if they see an opportunity for a shrewd investment.
The value of shares in VCTs does not always relate to the value of underlying assets, despite the fact that these funds are listed on stock markets. This means that monitoring the performance of an investment and making the decision to sell should not rely solely on the share price.
Dividends may be payable to investors from profits after the realisation of investments by the trust manager. In order to get an accurate reflection of how VCTs are performing, the net asset value and the total dividends paid out by the trust since its inception should be combined. Deciding to sell shares before the winding up of a trust is a relatively simple process, provided that the underlying assets are liquid – although it isn’t a decision that should be taken lightly.
Decisions to invest in Venture Capital Trusts should always be taken with the long-term financial benefits in mind, as selling shares prematurely (before the 5 year holding period expires) can leave investors out of pocket. Regardless of the share price, the dividends and various tax benefits are the real indicators of a trust’s health. However, if it is absolutely necessary, selling shares can be done in two ways.
Investors can enlist the services of a stockbroker in order to secure the sale of shares. However, selling ‘second-hand’ shares in this type of trust on the open market could have a negative effect on the price. It may also be possible to offload shares with the trust directly, but a ‘buyback’ option needs to be in operation for that to happen, which is not always the case. The underlying market conditions at the time of the sale will dictate which is the best course of action, and that is something a specialist financial advisor or the trust managers themselves can advise on.
It is worth remembering that the rules have changed regarding the deferment of capital gains. It is now not possible to defer a gain into this type of trust, but those who took advantage of such a transfer before the rule changes could find themselves liable for tax on those capital gains if they decide to sell.
Whilst not without risk, the potential benefits of investment in a VCT can be substantial. And with the right advice and a long-term strategy, investors can make those benefits outweigh any potential losses involved.