Venture capital trusts (VCTs) can be high risk, but last year investors’ bravery “was rewarded with tax-free returns of up to 50%”, says Kathryn Cooper in The Sunday Times.
VCTs are listed companies that invest in businesses worth less than £7m (or £15m as of 6 April). Investors qualify for tax relief of 30% on up to £200,000 of shares, provided they hold them for five years. Dividends and capital gains are also tax free.
Last year, while the average VCT fell 3%, the average generalist VCT (which backs a range of businesses) rose 0.5%, compared with a 7% drop in the FTSE All-Share.
The top performer was Foresight, which returned 51%. In the generalist sector Maven Income & Growth VCT 4 and 2 and the British Smaller Companies VCT rose 46%, 33% and 33% respectively.
The latter is the best performer over ten years, with a return of 276%. Traditionally seen as growth investments, VCTs increasingly pay regular dividends. In 2011, the sector produced an average yield of just under 5% – also tax free. But don’t let tax breaks blind you to the risks, warns Cooper. On average, VCTs have underperformed standard funds.