The Financial Conduct Authority (FCA) has decided that VCTs should not be classified as unregulated collective investment schemes (UCIS), which is good news because it means that retail investors can continue to use them as part of their investment and tax planning. By encouraging investment into smaller UK businesses, VCTs provide funding to a dynamic sector of the UK economy.
VCTs are listed on the London Stock Exchange, in the same way as investment trusts, and as such they have strong corporate governance measures in place.
The attractions of VCTs are the 30% income tax relief on new shares if the investment is held for at least 5 years, and the dividends which are tax free. They also provide portfolio diversification, because they typically invest in smaller companies of the sort that would not be included in other parts of the portfolio. It may be desirable to include exposure to smaller companies in larger portfolios, and gaining some tax relief in the process is helpful. With increasing restrictions on pension contributions, VCTs offer a very tax-efficient way of saving that complements pensions.
You can buy VCT shares in the secondary market, but the income tax relief is not available. On the other hand, they can often be bought at a substantial discount to net asset value, and the tax free dividends are still available.
Risk warnings
This document has been prepared based on our understanding of current UK law and HM Revenue and Customs practice, both of which may be the subject of change in the future. The opinions expressed herein are those of Cantab Asset Management Ltd and should not be construed as investment advice. Cantab Asset Management Ltd is authorised and regulated by the Financial Conduct Authority. As with all equity-based and bond-based investments, the value and the income therefrom can fall as well as rise and you may not get back all the money that you invested. The value of overseas securities will be influenced by the exchange rate used to convert these to sterling. Investments in stocks and shares should therefore be viewed as a medium to long-term investment. Past performance is not a guide to the future. It is important to note that in selecting ESG investments, a screening out process has taken place which eliminates many investments potentially providing good financial returns. By reducing the universe of possible investments, the investment performance of ESG portfolios might be less than that potentially produced by selecting from the larger unscreened universe.
