Venture Capital Trusts (VCTs) are failing to offer private investors more value than going direct, a Charles Stanley report suggested today.
The research found that despite various tax breaks, VCTs are not offering the expected higher returns against those ‘do it yourself’ investments and advised investors, many of whom are successful business owners and entrepreneurs, to consider going it alone.
Popularity and awareness of VCTs was raised when chancellor Gordon Brown introduced kinder tax conditions for private investors, prompting an upsurge in the number of trusts and size of funds available.
This proved a hugely successful way of raising finance for smaller and mid-size businesses, particularly those seeking an alternative investment market (AIM) flotation. In 2005 more than £500m was raised from around 40,000 retail investors alone.
However, the cause of the shift, the report claimed, is primarily down to the changes to the associated tax breaks announced by Brown in this year’s Budget. Incremental returns from the initial tax rebate on subscription were significantly reduced from 40% to 30% and shares must now be held for longer, increasing from three to five years, in order to claim relief. The tax generated return has in turn dropped from 12.3% to 4%.
When initial and annual charges levied by trust managers are thrown into the equation the value of choosing the VCT route drops dramatically, the research noted, raising the overall risk profile of the asset class.
“Quite simply, the figures show that under the new rules there is very little to attract investors to shares in many of the new VCTs,” commented Charles Stanley’s smaller companies analyst Robert Corden.
“However, some mature VCTs are now throwing off high, and possibly continuing, tax-free distributions and may well be of interest to investors,” he added.
Corden’s report appears in the current issue of the Charles Stanley monthly Investment Handbook (October 2006).
© Crimson Business Ltd. 2006
