Company Profiles

INTERVIEW: As Pension Tax Breaks Erode, VCTs, Other Structures Shine Brightly - Octopus Investments

Tom Burroughes, Group Editor, Valletta Malta, 9 May 2013

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Structures

VCTs, created in 1995, carry income and capital gains tax reliefs; they must invest 70 per cent of the funds they raise in UK “qualifying” companies (such as small unquoted firms or those quoted on the Alternative Investment Market) within three years. VCTs have a minimum term of five years, a maximum investment per person of £200,000 ($310,000) per tax year and a minimum of £5,000. EIS vehicles invest in companies that are not listed on a stock exchange; as such, they can carry a high risk. They carry income tax and capital gains tax reliefs. Through an EIS, an individual with no more than a 30 per cent interest in the company can reduce his income tax liability by an amount equal to 30 per cent of his share subscription. The minimum subscription is £500 per company and the maximum per investor is £100,000 per annum.

IHT-related investments work as follows: unlike gifts or trust solutions, which take seven years before they are completely exempt from inheritance tax, IHT-linked investments fall outside of an estate after two years. At a time when the UK government has not increased the nil-rate threshold on IHT in recent years, despite rising asset values and inflation, that is an attractive option, Octopus argues.

With such advantages, Latham said there is great potential to educate the public about their appeal, considering that they still do not obtain the same broad appeal and name recognition as, say, Individual Savings Accounts – a mass-market tax-advantaged fund model.

“It is frustrating that ISAs get so much more publicity than VCTs given that VCTs are an even more tax-efficient way of investing,” he said. “While ISAs offer tax-free growth, VCTs offer this and income tax relief when you invest,” he said.

These benefits have become more appealing as other tax reliefs – such as on pension savings for those paying top-rate income tax – have been eroded, as has happened recently under UK finance minister George Osborne. As the administration tightens the screws on so-called aggressive tax avoidance schemes, legally robust, legitimate investment vehicles are attractive as a result.

Octopus has over 30 people up and down the UK talking to wealth advisors about these structures, he said – a sign of how seriously it takes its message.

Industry figures - such as those provided by Allenbridge, a research firm - shows a wide spread in performance figures for different breeds of these structures, such as between VCTs that hold stocks quoted on AIM, say, and unquoted companies. For example, the Albion Venture Capital Trust, which started eight or more years ago, showed an internal rate of return of 6.5 per cent (as of early January, 2013); by contrast, the Oxford Technology 2 VCT plc was down by 8.3 per cent.

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