Risks & Commitments
Venture Capital Trusts (VCT)
Venture Capital Trusts are considered to be long term investments designed primarily for investors who understand the higher risks which they may carry and have the capacity to sustain any losses. You should read the product brochure and prospectus to ensure that you fully understand these products but ultimately it is your decision, and responsibility, if you chose to proceed.
There are significant risks associated with investing in venture capital backed companies. They will generally be at an earlier stage than more developed quoted companies and will often carry a higher risk of failing. VCTs are long-term investments and you have to hold your investment for at least five years to take advantage of the 30% income tax rebate. Most VCT managers would suggest you have an outlook of at least 5 to 10 years regardless of this.
You can sell VCT shares if you needed money quickly. However, there would be the significant possibility of a capital loss, especially in the early years. In addition, if you sell within five years, you will have to repay the reclaimed tax.
A further issue arises from smaller VCT funds who fail to raise sufficient money at launch. The resulting portfolio of investments may be more concentrated and this will increase the risks.
Each VCT will issue a prospectus at launch which gives details of specific risks, you should read this thoroughly before making any investment.
VCTs are only really a consideration for sophisticated investors with significant investment portfolios or experience who can afford to take a long-term view and are comfortable with the risks of investing in smaller companies. VCTs are therefore not suitable for all investors.
Most investors decide to invest 5 to 10% of their equity portfolio, but obviously for the individuals that can both afford, and are prepared, to take more risk this percentage can be increased. They are designed to pay out any profits only when the companies in which they invest are sold, and so you must take a long-term view (5-10 years plus).
These investments may not be suitable for you, however, as an execution only service, WealthMe will allow you to make your own assessment of your expertise and the suitability of a VCT for your circumstances. If you have any doubts you should seek expert advice.
VCTs invest in some of the most dynamic, entrepreneurial, high growth companies therefore they are high risk. They are long term speculative investments which give you the chance to get in on the ground floor of fledgling investment opportunities. This speculative nature means they are aimed at investors who have the capacity for capital loss. This means they are unlikely to be suitable for mainstream investors who may need access to their money in the short term or loss of the investment may cause financial hardship.
VCTs are one of the most tax efficient investments available where a £10,000 investment could cost as little as £7,000 with the prospect of tax free dividends and tax free growth. The tax benefits associated with investing in VCTs is subject to change and the exact value depends on your circumstances.
Key Risks of VCT
- Deemed by the FCA as a higher risk investment
- Companies are at an earlier stage of development and will often carry a higher risk of failing than larger quoted companies
- VCTs are long-term investments (5-10 years)
- Early encashment may lead to losses and removal of tax benefits
- No guarantee of success
- Speculative in nature
- Only pay out profits when companies are sold
- In the event that the company does not comply with the rules throughout the qualifying period, HMRC may withdraw and reclaim any tax relief which has been given
- These products generally invest in unquoted businesses and are therefore can be volatile in terms of value
- These products are generally designed to be a medium term investment (circa held for five years) and they may be either difficult to sell in that period or potentially selling early could result in a loss
- Charges applying to these investments are generally higher than those associated with other financial products
- You may not have the right to complain to the Financial Conduct Authority and you may lose the right of access to the Financial Ombudsman Service if you are a self-certified sophisticated individual or a high net worth investor
- You may have no right to seek compensation from the Financial Services Compensation Scheme
- Certain rules regarding the form and content of financial promotions will not be applicable. In particular in any financial promotions we communicate or approve which identifies or promotes a specific investment we will not be required to provide you with a comprehensive description of the nature of the investment, the commitment required or the risks involved
- If you qualify and have signed a certificate either as a self-certified sophisticated individual or a high net worth investor you may subject to promotion of an Unregulated Collective Investment Scheme. The content of this promotion has not been approved by an authorised person within the meaning of the Financial Services and Markets Act 2000. Reliance on this promotion for the purpose of engaging in any investment activity may expose an individual to a significant risk of losing all of the property or other assets invested
- In the event that the company does not comply with the rules throughout the qualifying period, HMRC may withdraw and reclaim any tax relief which has been given. At this point you may not have the right to complain to the Financial Conduct Authority and you may lose the right of access to the Financial Ombudsman Service