VCT investments,,,, experiences?

[isleofthorns]

Am thinking to invest into VCTs as a means of extracting excess company funds - ie, pay higher dividends than usual and investing in VCTs - with the 30% tax rebate mitigating much of the additional tax.

A friend (who happens to work in the FA industry) has told me that in his experience VCTs haven't been great performers, with the expectation that you'll probably get your money back gross over the 5 years, but not to expect much on top!

I'm open minded, as this would still be a reasonable way of extracting funds and mitigating the tax due. Thoughts?

[alscar]

There have been various threads on here about both VCT and EIS's.
I'm not sure how either work in from the business front aspect as have only ever invested in them personally so to speak.
VCT's are certainly very useful when it comes to offsetting income tax and every 5 years they can be recycled so in effect either reduces your tax bill over that period by 20% pa or 100% on a 1 year basis.
You also shouldn't invest just for the tax relief ie the investment should /needs to make sense to you.
I've invested in both for years and over that time and ignoring any tax relief would definitely be up on an annual basis and also including annual dividends and sales very definitely up.

[wattsm666]

If you don’t need it why extract to invest.

Leave it in the company and invest it. Possibly think about a holding company structure and invest from there to protect against the trading company failing.

[isleofthorns]

wattsm666 said:

If you don’t need it why extract to invest.

Leave it in the company and invest it. Possibly think about a holding company structure and invest from there to protect against the trading company failing.

I've been saving for a while in the company - it's actually become a distraction trying to keep my company from just being an investment company. taking money out is reducing this issue

[xeny]

There's a good analysis here https://www.finumus.com/blog/vcts-are-a-device-for... - with discussion in the comments.

[GingerMunky]

I have several VCT investments with Octopus over the last 7 years. I mainly do the investment for the 30% tax rebate, but they offer tax free dividends for the first 5 years. Here is my current position with Titan VCT:

£65,000 invested Dec 2015

£19,500 TAX rebate
£26,998 Dividends

£54,457 Nov 2022 value less 5% when sold (I am about to sell)

17% Capital loss (which I can use against other gains this year)

£54,457 + £19,500 (Rebate) + £26,998 (Dividends) = £100,955 Total Return

Therefore, 55.3% Gain since Dec 2015.

7.9% Annualised return

Note: whilst Octopus Investments have a stated aim to return 3.5% per year in dividends in practice some years it can be considerable higher when the dispose or float a company in the portfolio.

[xeny]

I am not a financial advisor, but my understanding was VCT dividends were always tax exempt, not just for 5 years.

Similarly are you sure VCT losses counted for CGT purposes?

[TurboTerrific9]

Having invested in VCTs for over 25 years I would suggest that there is way too much focus on tax savings over investment returns. Indeed the very first VCT’s literally had no expected exit.
I would focus on the investment first and then see if it can be combined with a tax efficient wrapper - or some sort of compromise between the two.

[GingerMunky]

xeny said:

I am not a financial advisor, but my understanding was VCT dividends were always tax exempt, not just for 5 years.

Similarly are you sure VCT losses counted for CGT purposes?

You are right Xeny, thank you.

https://www.gov.uk/guidance/venture-capital-scheme...

Tax relief on income from dividends - Yes

Relief available for capital losses against income - No

[isleofthorns]

GingerMunky said:

I have several VCT investments with Octopus over the last 7 years. I mainly do the investment for the 30% tax rebate, but they offer tax free dividends for the first 5 years. Here is my current position with Titan VCT:

£65,000 invested Dec 2015

£19,500 TAX rebate
£26,998 Dividends

£54,457 Nov 2022 value less 5% when sold (I am about to sell)

17% Capital loss (which I can use against other gains this year)

£54,457 + £19,500 (Rebate) + £26,998 (Dividends) = £100,955 Total Return

Therefore, 55.3% Gain since Dec 2015.

7.9% Annualised return

Note: whilst Octopus Investments have a stated aim to return 3.5% per year in dividends in practice some years it can be considerable higher when the dispose or float a company in the portfolio.

thanks - that's not too bad!

As my marginal rate is 40% (before this weeks budget anyway ....), my net tax rate would be 10% on any investment. I'd be happy to get back 100-125% of the gross over 5 years

Is there a platform (like Trustnet) where you look up past performances of the various VCTs?
.

[xeny]

isleofthorns said:

Is there a platform (like Trustnet) where you look up past performances of the various VCTs?

https://www.theaic.co.uk/

[alscar]

Another vote for Octopus - I too invested in their Titan offering and also Apollo before that.
If you want to offset CGT then EIS investments are perhaps worth a look at but the same caveat applies ie don’t just invest for the tax relief.

[isleofthorns]

xeny said:

https://www.theaic.co.uk/

thanks... very helpful

[bmwmike]

Hadn't looked at these in any detail before. So these can be used, like a SIPP, to reduce taxable pay?

[alscar]

Both VCT and EIS can be invested in up to whatever amount of income tax you pay assuming a straight 30% available in tax relief of the investment providing you then hold for 5 years - 3 for EIS.
If the individual company within a fund goes t*ts up and you have already claimed the 30% you then have to repay it.
Gains past the holding period are tax free.
But caveated - don’t just buy because of the tax relief available.

[bmwmike]

alscar said:

Both VCT and EIS can be invested in up to whatever amount of income tax you pay assuming a straight 30% available in tax relief of the investment providing you then hold for 5 years - 3 for EIS.
If the individual company within a fund goes t*ts up and you have already claimed the 30% you then have to repay it.
Gains past the holding period are tax free.
But caveated - don’t just buy because of the tax relief available.

Thanks. Didn't realise about the repaying bit; will look into that more.

[Mogul]

I was under the impression that so long as the VCT maintains its qualifying status for the min. five years that you hold it, you wouldn’t have to repay to any tax relief received up front if a portfolio company went tits up. That is indeed the point of the portfolio: they invest in 20+ companies and hope that 2-3 do really well and it doesn’t register if a few go to the wall along the way…

Investors can make money if the VCT stays level (ignore inflation here) as you have banked the 30% relief up-front, but of course you would hope to do better than this..

And if you do make a capital loss, ie. Sell for less than your entry cost, that is your loss and you can’t offset it against taxable capital gains made elsewhere… (this is the flip-side of the VCT’s CGT-free gains on the upside)

Edited by Mogul on Wednesday 16th November 17:10

[alscar]

Mogul is correct - my bad - I should have specified more clearly that the closure early of a company meaning payback of the tax relief obtained only applies to EIS schemes where you also get to see each company that fund invests in with separate contract notes etc.
That said I don’t know how many VCT entities actually do lose their qualifying status within 5 years at which point all of the tax relief does indeed need repaying.
Worth a quick read of HMG’s website on the other differentials between the two vehicles particularly on the CGT implications or benefits.

[Drl22]

Simple advice really speak to a financial advisor, this thread is proof enough you should not ask people on the internet for financial advice.