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Venture Capitalist Trusts


Libspero
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Anyone know anything about them?

Since Riski looks like he might tighten the screws soon,  I’m looking for alternatives to squirrelling money into a pension. 
 

VCTs look interesting..  but I know practically nothing about them.  Can anyone educate me/us at all?

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AlfredTheLittle

There was a bit in this thread, I think: 

I looked into it a bit but lost interest when I saw the fees they charge, combined with my level of knowing nothing at all about the trusts you have to give your money to it didn't seem particularly worthwhile, but I believe it's worked very well for Frankhovis over the years 

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Here is the original post by Mr Hovis,  I hope he doesn’t mind me copying it here:


 

VCTs typically have one share issue per year, though sometimes across multiple funds VCT1, VCT2, VCT3, and you have to apply direct to the VCT manager to buy the shares.

I've only ever invested with two managers - which I liked the look of when I did my research twenty years ago so I'm not saying that they are the best and won't list them in case you get that idea though will tell you if you PM me - and they keep me informed of future issues.

 

You can also track managers on the HL site for one where it notes upcoming issues:

https://www.hl.co.uk/shares/shares-search-results/o/octopus-titan-vct-ord-10p/share-news

https://www.hl.co.uk/shares/shares-search-results/h/hargreave-hale-aim-vct-ordinary-1p-shares

https://www.hl.co.uk/shares/shares-search-results/m/mobeus-income-and-growth-2-vct-plc-ord-1p/dividends

 

You don't get that much notice of the issuance - a month maybe - and they only issue when they have companies in which they want to invest and therefore can do something with the cash raised.  It is very possible that there will be no issues this year though that is very unusual and a reflection of the Covid madness.

You pay gross and make the tax recovery through your tax return.

The tax relief works differently to pensions. 

If you put £20k into your pension then it reduces your gross salary from the top down.  The tax relief depends upon what you earn - if you're paying 40% tax then you get relief at 40%.

If you put £20k into a VCT you get a flat 30% relief.  So if you pay tax at 20% and pay £6k this year on £30k over your personal allowance then you only need to put £20k into your VCT to get that £6k back.

 

My big caveat is not to think of them as shares - capital going up each year whilst paying a steady and increasing 3% dividend for example.

Whilst they pay a maintenance dividend of maybe 1p or 2p a year - funded from the interest / dividends they receive - their real aim is to make successful exits from their investments whereupon you get a big dividend.  This will however drop the asset value of the share and hence its price.

 

If you put £10k in shares and have value of £25k in ten years time that may be capital appreciation £12k and £3k of dividends.  You now have shares worth £22k and have £3k of cash.

Whereas if you put £10k in VCTs (ignoring the tax relief) and have value of £25k that is more likely going to mean that you now have shares worth £6k but £19k of cash.

I describe it as their eating themselves to pay the dividends.  As long as you're reinvesting the dividends you'll do well but if you're spending them thinking that your capital will be increasing you will be disappointed.

 

Dividends are currently tax free and don't even have to list them on your tax return.

The last time I looked you have to hold the VCT shares for five years in order not to have to repay some or all of your tax relief.

Personally I've never sold any and view them as a decent tax free dividend stream that will ultimately exhaust itself.

That certainly sounds quite interesting,  but I don’t understand quite how the the tax rebate works.  It sounds like you put X money in and get 30% back as an offset against income tax via a declaration on your Self-Assessment submission on the year you invest.

I think this is exactly what I’m looking for as I’m at expecting pension relief to be dropped to some degree at the next budget.

@Frank Hovis  Have I understood correctly?

Does anyone know if there is something like an AIC equivalent for VCTs?


 

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Frank Hovis

@Libspero here is my post from the Library thread.  There are several things to weigh before deciding whether they will work as an investment for you.  They are very different to normal shares.

 

 

I put this into a PM about VCTs which would probably benefit from a wider read.  It explains how VCTs differ to shares and what role they play in an investment portfolio.

 

 

To reiterate a few of features about them as they're not for everybody:

Tax relief is at 30% of the gross invested and is recovered by including them on your self-assessment tax return.  This is different to pensions where the offset is against gross salary so the tax saving varies depending upon how much you earn.  You have to have actually paid the tax in order to recover it.

The tax relief on new issues means that they are a much better investment on issue - you're only paying 70% - than in the secondary market where they do not have this tax relief upon resale.  They are investments where the best strategy by far is to buy and hold forever; what you are buying is the future (tax free) dividend stream.  They publish their asset value per share which is always higher than the share value.

Like normal shares they pay a maintenance dividend of 1 or 2%.  This is paid out of interest and dividends that they receive from their holdings rather than from capital; this is a legal requirement otherwise they could float at £1, investor buys for a £1, gets 30p back and then receives a dividend of a pound and the company is wound up.  Tax man loses.

They also however pay big dividends upon successful exits from their investments.  These can be really chunky but you should be clear that this is a repayment of capital; the VCT has sold investments and paid the cash to you as dividends meaning that the value of the VCT falls.  Though this is what you want as it is falling because it is paying you a tax free dividend. 

 

They worked for me as I always wanted to build up a decent tax free income stream that would not require me to sell anything.  However their lack of sustained capital appreciation means that they have always been a minority investment class for me, maybe 15%, and are there to pay me tax free cash which works within the portfolio as a whole.

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Thank you @Frank Hovis ,  that clears up a couple of things and highlights a few others.

1) I saw you say that you shouldn’t expect to see the capital back but instead enjoy the tax free dividends.  I was confused because most seem to target a fairly typical dividend of around 4-5%..   but now with the “wind up” dividend that makes sense.  
 

2)  I hadn’t considered that without the initial tax free benefit,  the shares would effectively become immediately overvalued by 30% making them difficult to sell (without taking a fairly big hit).   Not necessarily an issue,  I would be looking to buy and hold,  but definitely a consideration and good to know.

The part about winding up isn’t really mentioned much in the up front advertising on these.. is there a “ball park” time that each issue usually runs for,  or does it vary significantly from one issue/manager to another?

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Frank Hovis
1 hour ago, Libspero said:

Thank you @Frank Hovis ,  that clears up a couple of things and highlights a few others.

1) I saw you say that you shouldn’t expect to see the capital back but instead enjoy the tax free dividends.  I was confused because most seem to target a fairly typical dividend of around 4-5%..   but now with the “wind up” dividend that makes sense.  
 

2)  I hadn’t considered that without the initial tax free benefit,  the shares would effectively become immediately overvalued by 30% making them difficult to sell (without taking a fairly big hit).   Not necessarily an issue,  I would be looking to buy and hold,  but definitely a consideration and good to know.

The part about winding up isn’t really mentioned much in the up front advertising on these.. is there a “ball park” time that each issue usually runs for,  or does it vary significantly from one issue/manager to another?

 

I wouldn't say that it's anywhere near the full 30% but rather that they drop from being at asset value on issue to a discount from asset value on resale.

It would be more like you buy the share for £1 today and then would be selling it tomorrow with the tax relief for maybe 90p; that's more the order of it.  You'd still be well up.

I don't think that winding up a VCT is ever in the strategy; they have new issues of shares to recapitalise when they see opportunities out there.  What that means is that the portfolio will hold fairly steady through further investments but because they need new capital then if you're not partaking in the issue your holding is diluted and the next big successful exit that they make your share of it will be reduced.

That's what I mean about the share eating itself; you will keep getting dividends but they will steadily reduce as your percenatge shareholding drops with each new issue.

When I was working I was putting the dividends back into new issues for the tax relief so my shareholdinsg were holding steady as a percentage.

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