Venture Capital Trusts

Risks and benefits of VCTs

Prospective investors in VCTs and EIS funds should ensure that they read the specific risk warnings set out in the relevant prospectus before investing.

There are considerable tax advantages offered to investors in new VCTs. Overall, they offer suitable investors a tax-efficient way to put money into new opportunities that may have the potential to bring a very high return. However, investors need to know that in doing so there is also a high risk of a low return, including loss of capital.

VCTs may be a useful product for some consumers as part of a balanced portfolio of investments, but they are inherently high risk products; the underlying investments are high-risk, investors may get back less than they invested and there is a limited secondary market.

An investment in a VCT is only suitable for investors who are capable of evaluating the risks and merits of such investment and who have sufficient resources to bear any loss which might result from such investment.

Limited secondary market: The secondary market for shares in VCTs is limited so you may find it difficult to sell your VCT share after three years as there may be a shortage of buyers and as a result shares in VCTs can trade at a discount to the net asset value. To partially address this issue, some VCT Managers offer a 'Buy Back' facility normally at a discount to the net asset value. VCTs and EIS funds often invest in unquoted companies which are small and which carry an above-average level of risk and whose shares may not be readily marketable. You should, therefore, consider what buy-back arrangements may be on offer and on what terms.

Type of company invested in: VCTs are designed to provide capital for small companies and each VCT will invest in several companies. As such, there is a risk that these companies may not perform as hoped and in some circumstances may fail completely.

Subscription Offer: If a VCT does not meet the full subscription offer, it may be difficult to achieve a spread of investments and diversity, thereby leading it to be a higher risk product.

Where the 30% Non Qualifying Investments are invested: Traditionally, VCTs have invested the 30% Non Qualifying Investments in money market securities/gilts/cash deposits etc. We are aware that a few VCTs have invested part of the 30% Non Qualifying Investments in more risky investment vehicles.

Withdrawal of tax breaks: The generous tax breaks are one of the major attractions of VCTs. The tax reliefs available to certain investors in VCTs are dependent on the VCT maintaining Inland Revenue approval. If this approval is withdrawn, a VCT will lose its status and all tax reliefs are likely to be cancelled. Investors must keep their VCT shares for five years to retain the up-front income tax relief. If the investment is not held for five years or if the VCT does not invest 70% in qualifying investments after five years, the initial tax breaks can be withdrawn. The tax rules and regulations governing VCTs and EIS funds are subject to change.

Long-term nature of the investment: Generally, VCTs are considered to be long-term investments. Many commentators suggest 7 to 10 years is necessary.

Charges and performance fees: The levels of charges for VCTs may be greater than Unit Trusts and Open Ended Investment Companies. The details are available in the prospectus, make yourself aware of them.

Security of capital: As with any asset-backed investment, the value of a VCT depends on the performance of the underlying assets. The value of the investment and the dividend stream can rise and fall. So the investor may get back less than they originally invested, even taking into account the tax breaks.

Past Performance: The past performance of VCTs or other investment products is not necessarily a guide to the future performance.

Moneyworld does not provide, and nothing on this website should be construed as, investment or tax advice.