With restrictions on pension contributions and the lifetime allowance for pensions coming down from £1.8m to £1.5m in April, other forms of tax-efficient investment may need to be considered. These include Venture Capital Trusts.
The initial investment of up to £200,000 in a tax year provides 30% tax relief provided the shares are held for 5 years, and dividends and capital gains are tax free. The investment can complement a pension by providing tax free income in retirement. Capital gains may be distributed as dividends, and the dividend yield is often relatively high. They are relatively high risk investments, because they invest mainly in smaller companies, and they can be illiquid.
The VCTs currently available for investment include:
Albion VCTs: Top Up Offer: this is a generalist VCT that provides immediate tax-free dividends of approximately 5% from an established portfolio of companies. The manager has a 15 year track-record of performance in the sector. The minimum investment is £10,000.
Northern 2 VCT: private equity investment into smaller growing businesses. It invests mainly in unquoted venture capital holdings, and aims to provide high long-term tax-free returns to shareholders through a combination of dividend yield and capital growth. The VCT has a 12 year track-record. The funds raised will be spread across 43 companies already held by the Trust, which should diversify risk and will provide immediate exposure to the private equity asset class. The anticipated dividend is 5.5p per share, which is 9.7% of the net investment cost of 56.7p, being the current offer price of 81p less 30% income tax relief.
ProVen VCT: since 2000, when the shares in Proven VCT were first issued, the total return has been 163.6p per 100p invested, placing it in the top 10 of all VCT share issues; and is equivalent to 6% per year, more than double the return on the UK All Companies over the same period. The strategy is to invest in good quality small and medium sized private companies which have significant growth potential. The VCT already has a portfolio of 16 venture capital investments, with a value of £11.8m. The average dividend on the ordinary shares over the last 5 years has been 17.1p per share. The manager (Beringea LLP) is currently experiencing a strong flow of attractive investment opportunities.
Downing Planned Exit VCT2 & 3: to date the Trust has raised £55m and distributed over £20m as dividends. It has now launched a new offer seeking to raise up to £20m in a separate F share class. There is a strong flow of investment opportunities, enhanced by the lack of alternative sources of finance. Downing has specialised in investing in businesses owning freehold or long leasehold property, and the F shares will focus on asset-backed investments and may also invest in businesses with predictable revenue streams, such as childrens’ nurseries, health clubs, pubs, conference centres and renewable energy businesses. The target income is 5p per share, equivalent to 7.1% based on an offer price of 100p less 30% tax relief. The Trust will seek to sell all of its investments after 5 years, and pay the proceeds to investors in approximately 6 years. Before then, the Trust will buy back shares at net asset value subject to regulations and having sufficient cash resources.
Ingenious Entertainment VCT 1&2 G shares: an opportunity to invest in companies in the UK live entertainment sector. The structure offers significant downside protection, through pre-sales or similar minimum revenue arrangements to cover at least 75% of each investment. The targeted tax free returns are 14.3% per year. The anticipated dividends are 5-7p per share. There is a five year liquidity strategy. The investment is non-correlated with stockmarket and other investments, providing useful diversification. Ingenious has backed many commercially successful projects in the live events and media sector, from the award winning Creamfields to the highest grossing movie of all time Avatar.
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.
