As we come to the second half of the 2016/17 tax year, advisers are seeking to ensure clients’ portfolios optimise their various allowances.
This focus on tax allowance optimisation also puts us at the height of the asset gathering season for tax-advantaged investment products.
In the wake of changes to pensions, tax-advantaged investments are more relevant than ever before, as investors look to venture capital trusts (VCTs) and Enterprise Investment Schemes (EIS) as part of their overall portfolios.
So if your clients are considering investing in a VCT, how do you spot a good manager - for there are many out there.
Supporting smaller businesses
The VCT market is now reasonably mature, having been established more than 21 years ago to encourage investment into smaller companies.
It is this investment in SMEs where the tax benefits of a VCT come into play – as they are designed to compensate for the increased risk associated with investing in smaller, less liquid companies.
The tax incentives for VCT investors include 30 per cent income tax relief on the initial investment, subject to a maximum of £200,000 per investor and a five-year minimum holding period.
Plus, dividends paid are tax free and there is no capital gains tax (CGT) to pay when the VCT is sold.
However, in the current record-low interest rate environment and with continuing pressures on pensions for many; it is the tax free income of a VCT which makes them attractive for the majority of investors.
1. The process for spotting potential
A good VCT manager needs lots of experience and specialist expertise to spot real potential for success in a small business. There are lots of small to medium-sized enterprises looking for funding, so a good VCT Manager needs to be able to sort the wheat from the chaff.
Often this involves meeting the management team and getting under the bonnet of the business and the investment team must be well resourced, as this company research can be very time consuming.
The Manager will be following a robust, disciplined and proven investment process founded on relevant experience in the underlying asset class in question, whether that be the Alternative Investment Market, infrastructure finance or growth capital for example.
One indication of whether the manager ‘has what it takes’ is by looking for a proven deal flow, with a track record of positive investment outcomes – where the underlying companies have achieved or exceeded market expectations.
That way you’ll know if they can spot a business that has the potential for success, even perhaps to become a future household name.
Qualifying criteria
There are investment rules that VCTs must follow to qualify for tax reliefs. VCTs are listed on the London Stock Exchange and investors subscribe for shares. The VCT then invests in a portfolio of “qualifying” companies.
