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Avoiding tax with VCTs

VCTs - saving you tax...

Venture Capital Trusts (VCT) are an investment company, similar to an investment trust which is listed on a stock exchange, and offers savings on income tax. The tax break is pretty good – currently 40% even if you’re not in a high tax bracket.

But, be warned:

This tax incentive comes with a high degree of risk because VCTs can only invest in small private companies, plus those listed on the Alternative Investment Market (AIM) and OFEX (where many small companies begin their lives as publicly listed companies).

VCTs have a poor reputation for making money. Many haven’t grown investor’s savings at all and others have lost a lot of money. They are also illiquid investments – they are hard to sell on.

You have to keep the investment for three years or face losing the tax break.

Management charges for VCTs are much higher than for most funds.

The tax incentive might be pleasing, but you need to research your options carefully beforehand and satisfy yourself that the investment is sound. Consider MoneyMagpie’s tips on investing here.

In fact, although there is this lovely 40% tax saving with VCTs, on the whole they haven't been a great investment for most people in the last few years. The performance of most of them has been pretty disappointing so, again, we say make sure you do your research before putting money into them. Remember that old investment adage: don't let the tax tail wag the investment dog.

More info about VCTs can be found at Trustnet and the Tax Efficient Review.

Jasmine and the Moneymagpie team
Moneymagpie Moneypedia
27.06.2007