VCTs for FinancialIndependence: Part 2 – Buying/Holding/Selling

If you are interested in seeing how Venture Capital Trusts could give you 30% tax relief, tax free dividends and exposure to fast growing companies read part 2 of this guide on how to buy, sell and hold VCTs

In Part One you started drooling over the massive 30% tax relief, tax-free dividends and capital gains tax exemption. But please read the WEALTH WARNING.

I’ve put a bit of thought into what I’m going to say and how Venture Capitalist Trusts can be used for a those looking to retire early but that’ll be covered more in Part 3. When used correctly they can provide a path to prosperity but it’s not without pitfalls. Part 1 was an introduction and overview. This part will cover the practicalities of buying, holding and selling VCTs along with some other things you need to know.

How to Buy

You can invest in VCTs in four different ways and each way is different in its own way.

  1. Buy the newly issued shares in a new VCT at a share placing/fundraising round.
  2. Buy newly issued shares in an existing VCT at a share placing/fundraising round
  3. Buy VCTs on the secondary market
  4. Reinvest dividends into VCTs

Of these, only the 30% tax relief is paid in 1,2 & 4 but in all of them dividends are tax free. Since the main attraction in VCTs is the tax relief there’s little appetite on the secondary market for buying VCTs.

Buying into an existing VCT is my preferred route in. Often the funds raised are maybe a fraction of the total value meaning you join other shareholders on a pari-passu basis and your money is working from day one. If a VCT takes on a lot of capital and doesn’t invest it, you are paying a hefty fee for them to sit on your cash – and some do like to do that.

What to Buy?

When it comes to VCTs, there are lots out there, so it can be confusing, with different providers and funds. These can all be split into 4 different groups of VCT:

  1. General/generic – investing in smaller companies across a wide range of industry sectors
  2. AIM – invests mainly in qualifying AIM-quoted companies.
  3. Sector focused – investing with a focus in say healthcare, or technology – perhaps as the VCT provider has special expertise in this sector. In the past renewables were a big feature (sadly no longer)
  4. Limited Life / Fixed term – investing with an aim to close the fund after 5 years. Investment may aim to be lower risk for capital preservation and invest in convertible debt/loan notes.

You can see which VCTs are raising funds here from Wealth Club. For offers, the typical minimum purchase is £5,000 but can be lower. If the VCT house has more than one VCT, you may be able to split your investment across all/some/both/one or the other of the VCTs. Likewise, you can invest across different tax years so that a £10,000 investment in a VCT could be split £6k this tax year and £4k the next. For purchasing on the open market, these rules don’t apply.

The screengrab below shows you a few that are open as of July 20th on Wealthclub. The is a bit of seasonality around VCT offers and fillings with the months leading up to the new tax year being the busiest. For some of the most popular VCTs like Northern, British Smaller Companies, Albion and Baronsmead they can fill up within days of being released. (I once sent my application by recorded next day delivery for one VCT, on the day of it opening and still didn’t get in on the placing). While some other VCTs can hang around for months without attracting much interest.

This year Baronsmead raised funds direct without going through the middle men like Wealth Club. The offer was not mentioned by them (no commission) and only existing shareholders or those in the know knew about it. So be warned.

Application / Buying

I personally use Wealth Club but won’t recommend them as I’m told that Charles Stanley are better and there are others you can go through. What to look out for 1) good discounts 2) good rebates 3) good service.

Applying for VCTs has been a bit old-school with printed prospectuses and applications forms, wet signatures and stamped envelopes to post. It’s changing and becoming more streamlined with my last few applications being entirely online. You also get that dodgy feeling of transferring thousands of pounds to a bank account number you read on the internet…

Ironically, going direct to a VCT house costs you more as there is an initial fee on the purchase of new shares. This is known as the “initial charge” and it is legally limited to 5.5% but typically you pay just 2-3%. Those who use an Financial Advisr may find that they keep some of that 5.5% – f**king T.W.A.T.s – so shop around.

We want our money back!

Like an angry Maggie Thatcher – you need to demand your money back. You can invest up to £200,000 per tax year in VCTs and claim up to £60,000 back in tax. If you have that much money you probably have an accountant but if you are like GFF and go DIY, then you need to claim it back yourself. It’s important to mention that to be eligible for the tax relief you need to have paid enough tax in the tax year you invest in to reclaim the 30% tax. So if you have earned £42,500 this year and you have been taxed on (£42,500 less £12,500 personal allowance) = £30,000 taxable income @ 20% = £6,000 income tax paid. That £6,000 could be rebated to you if you invest in £6000 / 30% = £20,000 in VCTs. The tax refund from VCTs is reclaimed via your self-assessment form for the previous tax year. However if you want to go full Thatcher and get it sooner, you can post your VCT tax certificate to the HMRC and they’ll send you the money. Individual tax situations will differ – so it’s important you do your sums before investing.

Holding

Once you have been successful in buying VCT shares, you will be sent paper share certificates (just like in the old days) and you can file them away and pay no attention at all for the next 5 years but you need ot sell them through a broker like Hargreaves Lansdown, YouInvest or X-O. I had mine with HL and they have no fees for holding them in their Vantage account unlike some other providers who take 0.25% per annum as fees. However, the selling fees were about 1%+VAT and a min. of £25 – which I didn’t like. Because I had a number coming up to maturity I switched to X-O [LINK} who do trades for £5.95 – basic service but low cost (X-O = execution only).

Dividends

Like other companies, VCTs declare dividends and pay them out, typically on a twice annual basis but some pay annually and some pay quarterly. Dividends are paid either by cheque, electronic bank transfer or if you transfer the shares to a broker, your brokers account. I find paper cheques a waste of time so it’s all electronic for us. The dividend rates vary of course, but you can typically be looking at 4-5% of NAV annually. In the past, large one-off dividends have been paid on the disposal of success holdings. You don’t need to declare your dividends on your self-assessment form.

A 5% tax-free dividend is equivalent to 5.4% for a basic rate tax payer, 7.4 for higher rate tax payer and 8.1% for an additional rate tax payer. Another attraction.

Shareholder Communication

Once you have VCTs, you’ll maybe start to get lots of post coming through your door  – AGM notifications, dividend certificates, share certificates, annual reports – it’s all a bit of a pain. But there’s been no spam mail in my experience. I opt to have electronic copies sent to me by email to save the hassle. You’ll be informed of some things by email but not others, so I use Investegate [LINK] to have notifications sent to me by email for all my VCTs (and other shares) – this way I get all the RNS [LINK] about the VCTs and find out important things like annual reports and dividend payments

Personally, I keep an eye on the monthly sell prices for my family finances spreadsheet and keep an eye on announcements at Investegate to track investments they make, dividend declarations, annual reports and what not. The minimum holding period for newly purchased shares is 5 years to be eligible for the 30% tax rebate. For reinvested dividends the period is just 3 years. And shares bought on the open market have no minimum holding period (but not tax relief).

Selling

Shares in VCTs are sold through a broker like X-O or Hargreaves Lansdown. Often the VCT house agrees to buy back the shares at a discount to NAV, typically 5-10% – although this is not guaranteed and the market for VCTs is thin meaning if you really need to money you might have to sell at a steep discount or not sell at all and the buy/sell spread can be large.

In my experience, selling has been straightforward with one sale only taking 2m34s with HL – that was over the phone. X-O do it online (and for less!) Alternatively you could sell certificates with these guys (never used them and can’t recommend).

6 month rule

Potentially you could keep investing in the same VCTs and selling them after 5 years and buying back to get the 30% relief. To prevent this, HMRC has what is called the 6 month rule, stating that you cannot claim the relief if you dispose of and sell the same VCT within 6 months. Handily VCT providers commonly have two or more funds to allow you to play tag team and a one spouse buying while the other sells is within the rules – so it’s something to be aware of but it’s not a problem if you understand how to play the game.

Past performance & Smoke and Mirrors

Long term performance of VCTs is poor compared with other Investment Trusts. Without the 30% most of the time, investors would have been better just putting their money in another product or just kept it in the bank.

VCT providers often like to market their products as being great – expect a 20% growth over 5 years turning £5,000 into £6,000 and it only costs you £3,500 a 71% uplift or an IRR over 11%! But the tax rebate is not theirs to give and 20% (if they achieve it) over 5 years is only just an IRR of less than 4% – hardly stellar stuff. VCT providers will be quick to tell you about their investment in Zoopla that’s now worth £1 billion but they’ll not mention about all the write-offs and how the fund has not seen a rise in total return in years, bleeding fees once they sold that ten bagger.

Which VCT should I invest in?

Simple answer is that there is no way of knowing – past performance is no guide to the future. And working out what to you actually can invest in is difficult – some of the best offers close quickly as investors flood in but past performance is no guarantee of the future. And a VCT that looks really good might just have spent a lot on marketing and is no better than average. Essentially it’s a minefield and there’s no sure bets. I’ll cover my own experience in Part 4 with a bit more details.

The fees are often around north 2% of NAV – as well as initial charges and selling fees (they are traded but without the depth you see with other investment trusts). The 30% rebate can be eaten up quite quickly.

Summary

Hopefully this has given you a bit more information about VCTs. For a list of (most) open VCTs see here. In the next post, I’ll show how VCTs can be used for early retirement or towards financial independence.
Thanks, GFF

Note: this is not advice and this is for information purposes only. I hold shares in some of the VCTs mentioned. There are no affiliate links in this or other GFF’s VCT guide articles.

5 Comments

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s