Time is ticking on race to invest in VCTs

Investors not in a rush may wish to look at new report for alternative income ideas
Thursday 09 Feb 2017 Author: Daniel Coatsworth

Venture capital trust (VCT) offers are selling out in record time, suggesting that investors shouldn’t wait until the end of the tax year if they want to put their money in these types of products.

VCTs come with an array of attractive tax benefits, as well as being a good way to get exposure to early-stage businesses.

A year ago I explained in Shares how changes to the pension system could make VCTs more popular with retirees given tighter limits on pension contributions for high earners. You can invest up to £200,000 a year in these products and get 30% income tax relief, together with tax free dividends.

There is now clear evidence that VCTs are indeed ‘cleaning up’ and taking investors’ cash faster than before. The Association of Investment Companies says VCT fundraising to the end of 2016 for the current tax year was up 53% on the previous year.

FUNDRAISING GOALS HIT

Unicorn AIM VCT reached its £15m target on 3 February. Maven Income & Growth VCT 6 stopped taking new applications on 7 February. Albion is also close to hitting its £34m target.

We will publish a list of remaining VCT offers in the 23 February issue of Shares and talk to some of the providers about the underlying investments in these products. We will also look at the pros and cons of investing in VCTs and explain how they really work.

INCOME APPEAL

Some VCTs pay dividend yields in the region of 5% to 8%. Investors searching for attractive income yields may therefore find this asset class very appealing, albeit on the understanding that you need to lock your capital away for at least five years to qualify for the tax benefits.

Anyone who doesn’t want to lock their money away may instead prefer to look at the latest Income Study report from Sanlam Private Wealth which looks at a wide range of dividend-paying funds.

The report is updated every six months and has been running for more than 20 years. I’d suggest you look at the White List component of the report as these are funds with a track record over five years or more of producing superior returns.

The list includes CF Miton UK Multi Cap Income (GB00B4M24M14), Schroder Income Maximiser (GB00B0HWJ904), JOHCM UK Equity Income (GB00B95FCK64), Royal London UK Equity Income (GB00B3M9JJ78) and Threadneedle UK Equity Alpha (GB00B88P6D76).

These funds yield in the region of 4% to 4.5% apart from Schroder which is on a yield of 6.7% as it turbo charges returns by using derivatives. This introduces a higher element of risk.

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