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VCT risks

Sophisticated and complex high-risk tax-sensitive investments in small companies: handle with care
bluebag
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VCT risks

#430813

Postby bluebag » July 27th, 2021, 10:22 pm

Hi

I have been interested in doing some VCT's for the 30% tax relief as advised by our financial advisor. I have been doing some reading and I've seen that the VCT's are more riskier than in the past due to some changes a few years ago which made it more difficult for an investment to quality for the 30% VCT tax relief.

I know that there are risks of struggling to sell the shares at the end of the 5 years period however our financial advisor mentioned that they purposely advise each customer that the VCT could last for 5.5 years as this helps them to manage client expectations in the event that the shares take an extra 6 months to sell. They also mentioned about some companies that have deals where they will buyback the shares.

We had asked about losses with VCT's however they mentioned that they have not lost their clients any money till date, but that it is not guarantee for the future. They advised us about some potential returns but made it clear that we could only benefit by 1%-2% too, which would still be good as it is the 30% tax relief which we are mainly benefiting from.

I was just wondering, what have people's experiences been with VCT's over the last few years? I appreciate that it is no indication of how mine will perform, however I just wanted to see if people have been coming off VCT's since the rules changed and if they have been struggling to get good returns since those changes, or if the companies that they invest in VCT's through have adapted to the changes quite well and mostly chosen successful VCT's.

barchid
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Re: VCT risks

#430923

Postby barchid » July 28th, 2021, 11:08 am

bluebag
You ask a tricky question regarding likely vct performance under new rules but one thing I would say is that there is a wealth of valuable information on this board and it might well be a good idea to not use an IFA but to diy as that way you can make a significant savings in fees and probably tailor your purchase(s) more to your risk profile ?

bluebag
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Re: VCT risks

#430962

Postby bluebag » July 28th, 2021, 1:40 pm

barchid wrote:bluebag
You ask a tricky question regarding likely vct performance under new rules but one thing I would say is that there is a wealth of valuable information on this board and it might well be a good idea to not use an IFA but to diy as that way you can make a significant savings in fees and probably tailor your purchase(s) more to your risk profile ?


Hi Barchid

Thank you, I will have a look into it. I was originally advised that for a beginner like myself, IFA's would generally work out cheaper for things like ISA's/Pensions despite their fees in the long run compared to DIY as I would probably lose more doing it myself. However, I could have been given the wrong advice so it is interesting to hear it from your point of view.

I will look into doing VCT's as DIY and hopefully I will make some good savings, my IFA did say that they negotiate the best discounts with VCT's and minimal fees (not their fees but the VCT fees) due to the amount of clients they bring but maybe their 'negotiated discounts' are not so great.

flyer61
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Re: VCT risks

#430968

Postby flyer61 » July 28th, 2021, 2:07 pm

bluebag,

this is not an advertisement for these people but a good starting point would be to have a look through their site and the information they provide.

https://www.wealthclub.co.uk/

UncleEbenezer
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Re: VCT risks

#431000

Postby UncleEbenezer » July 28th, 2021, 4:47 pm

Re: DIY, bear in mind that this is a forum for people who take an active interest in investment. Natural DIYers - whether or not we're any good at it. That may or may not be right for you, but the mere fact you're here suggests you have something in common with us.

Nearest you'll get from me to an 'answer' to your question is at viewtopic.php?f=25&t=30246#p426464

Vulgaris
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Re: VCT risks

#431066

Postby Vulgaris » July 28th, 2021, 10:39 pm

There is risk everywhere with a society destabilised by COVID and, more so, by lockdowns. And in an economy where the state buys half the gilts issues under the bizarre aegis of QE.

All you can do is try to spread risk. Some of your spread lies in new economy start ups, for which it's prudent to accept the tax relief of EIS or VCT status. Some real estate, blue chips with pricing power, and precious metals, none of which (except maybe platinum) are cheap.

I would, though avoid fixed interest bonds.

Karellan
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Re: VCT risks

#431294

Postby Karellan » July 29th, 2021, 7:12 pm

Blue ,
I am never sure whether there is much in it for IFAs so why should they reccomend them ? (I could be wrong).

Many on this site have been here a long time and we are still benefitting from VCTs of long standing. Its probably true that its different now. Over the many years I have been happy with my returns and continue to buy them yearly in small amounts.

There were some shockers years ago but diversification and avoidance of them help here. There is a lot of advice on this board freely available. There are some less good VCT stables. I find that I dont have too much of them , that helps.

sinterklaas
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Re: VCT risks

#431312

Postby sinterklaas » July 29th, 2021, 8:34 pm

Since the 2015 rule changes, if anything it's the VCTs who were already aligned with the new rules (i.e. backing growth companies) that have largely done pretty well over the last 5 years.

Conversely, among the worst performers have been many of those that aimed to stick to 'safer' investments, in particular alternative energy assets and 'asset backed' style.

This might be a historically strong period for VCTs mainly because
- some VCTs pre-2015 investments (including but not limited to MBOs) are now mature, they exit at a comfy 2-3x or may pay dividends to the VCT which it can then distribute
- some of the post-2015 growth investments are also now maturing. Several have already achieved exits
- the pandemic helped more than hindered a lot of future-oriented, digitally-delivered services and technology companies
- there's a good market for exits and IPOs this year

I differ from many on the rest of the forum re: my optimism on today's crop VCTs. There are lots of esteemed regular LF contributors who bemoan the loss of e.g. schools and nursing homes from e.g. Albion VCTs. They have paid dividends for many years so who am I to argue? Mainly because I think the future holds even better. Looking forward I believe there are plenty of great opportunities from a surge in innovation and entrepreneurism in UK. 2nd- and 3rd-time founders, better venture ecosystem, technological underpinnings in place, technical invention happening fast... In the current economy smaller and newer companies are able to grow faster (and access the capital to do so) better than ever, in my view.

As Karellan says, diversification and choosing good managers. I believe in steering clear of the 'me too's and going with those for whom venture investing runs deep in the blood.

bluebag
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Re: VCT risks

#432070

Postby bluebag » August 2nd, 2021, 4:25 pm

Thanks for all of the advice everybody, I will consider it all.

Artistxman
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Re: VCT risks

#441837

Postby Artistxman » September 13th, 2021, 11:31 am

My recommendation would be based on the thread |I posted on my portfolio return which is still positive to start small and take baby steps so that you can assess yourself the risk. There is no right or wrong answer on the risk- it depends on your situation. But always maximise your ISA and pension if you haven't done that...VCT shouldn't be the first choice in my view.

Gostevie
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Re: VCT risks

#441853

Postby Gostevie » September 13th, 2021, 12:31 pm

Artistxman wrote:My recommendation would be based on the thread |I posted on my portfolio return which is still positive to start small and take baby steps so that you can assess yourself the risk. There is no right or wrong answer on the risk- it depends on your situation. But always maximise your ISA and pension if you haven't done that...VCT shouldn't be the first choice in my view.


I slightly, and very respectfully, don't totally agree with this. The 30% upfront tax relief on new issue VCTs makes them very worthwhile in my opinion.

Gostevie

127tolmers
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Re: VCT risks

#441879

Postby 127tolmers » September 13th, 2021, 2:13 pm

An interesting take on VCT risk from Mattioli Woods

https://mattioliwoods.com/latest-articl ... ent-gambit

.............
Counterintuitively, I have long promoted a VCT programme to my clients as a tax efficient income play, not a speculative growth gambit. Diversification does much to control investment risk, but obviously dilutes the return potential by spreading risk and dampening down volatility. Diversification does this effectively, providing a high probability that over the medium to longer term, the portfolios capital value will at least be maintained, and generally some growth.

The real benefit, having said all of the above, is the tax-free dividends. Again, it is counterintuitive to think of high dividends being derived from early-stage businesses. They usually have ferocious appetites for cash in developing their fast-growing business. While that is certainly the case, the reason why VCTs can pay attractive dividends is because the manager can retain cash from successful exits to support a dividend strategy. Again, diversification is key and generally the VCTs we deploy can boast strong dividend paying track records, with dividends varying from 3% to 7% per annum. A well-diversified portfolio will typically average tax-free dividends in excess of 5% per annum (although of course this is not guaranteed).

Due to the unfortunate perception that VCTs are high risk investments, they are very often only promoted to very wealthy individuals who are likely to be higher rate taxpayers. However, to a basic rate taxpayer a 5% tax-free dividend is the equivalent to an income return of 6.25%. Adjusting for the 30% income tax credit, the income return rises to nearly 9% per annum. The comparable figure for the higher rate taxpayer is circa 12% per annum.

Building a portfolio over a period of years to an agreed asset allocation improves the client's post tax income each year through a combination of the 30% tax credit and growing dividend stream. Once complete, the portfolio is likely to generate an attractive, tax-free dividend income over the long term.

In summary, deploying VCTs to generate long term income creates a risk-controlled gambit capable of generating income at levels inconceivable from alternative initiatives.

barchid
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Re: VCT risks

#441887

Postby barchid » September 13th, 2021, 2:27 pm

Tolmers
Yes, interesting but do remember that they have just taken over Maven having previously taken a stake in Amati which was then unwound some months later with no reason given to my memory.
So yes, they do have skin in the game now, question is what will they do with Maven ?
A lot of legacy investments still in their potfolio with other odballs such as Crematoria (which I think should do well), but they previously relied a lot on oil related start ups. MBO's which used to abound in NE Scotland before it started its falling out of favour.

Gostevie
I am inclined to your view, especially if one recycles the vct's after 5 years, providing you do not run out of income tax paid. There have been some good performances during the pandemic which I suspect will carry on. Dr Jourdan of Amati suggests that Nasdaq stocks trade on double the rating of a similar Aim share & are attracting attention in US for that reason, hence my optimism.

xeny
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Re: VCT risks

#441893

Postby xeny » September 13th, 2021, 2:48 pm

127tolmers wrote:An interesting take on VCT risk from Mattioli Woods

https://mattioliwoods.com/latest-articl ... ent-gambit


Tht certainly matches my experience of them over the past decade or so. Handily over that time, I've moved near enough to early retirement that it's attractive to retain them to generate a reasonably stable (I've got a reasonably diverse portfolio) base income.

Artistxman
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Re: VCT risks

#441943

Postby Artistxman » September 13th, 2021, 4:49 pm

Gostevie wrote:
Artistxman wrote:My recommendation would be based on the thread |I posted on my portfolio return which is still positive to start small and take baby steps so that you can assess yourself the risk. There is no right or wrong answer on the risk- it depends on your situation. But always maximise your ISA and pension if you haven't done that...VCT shouldn't be the first choice in my view.


I slightly, and very respectfully, don't totally agree with this. The 30% upfront tax relief on new issue VCTs makes them very worthwhile in my opinion.

Gostevie


Sorry may be my response came across as black and white...I am a big fan of VCTs and hold a whole portfolio. I was mainly trying to assess the question of risk and thought the least risky is the pension, ISA(dependent on what you hold with in ISA) and then VCT for a high earner who is paying 45% tax. If you can't take advantage of 45% tax benefit in pension- no point in trying to get the benefit of 30% tax return is the point I was trying to make. I genuinely hope that VCTs become a long term good investment as it does offer 30% tax benefit and then 4-5% dividend(tax free= 8-9% for 40% tax payer). Thanks for your responses and I value the opinions tremendously on this board.

xeny
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Re: VCT risks

#442035

Postby xeny » September 14th, 2021, 7:26 am

Gostevie wrote:
Artistxman wrote:My recommendation would be based on the thread |I posted on my portfolio return which is still positive to start small and take baby steps so that you can assess yourself the risk. There is no right or wrong answer on the risk- it depends on your situation. But always maximise your ISA and pension if you haven't done that...VCT shouldn't be the first choice in my view.


I slightly, and very respectfully, don't totally agree with this. The 30% upfront tax relief on new issue VCTs makes them very worthwhile in my opinion.


The counter argument to that (obviously depending on what you hold in the ISA/Pension) is that VCTs typically have pretty high management fees, which over the 5 years you need to hold them can easily equate to some or all of that 30% relief. Discussed here https://www.finumus.com/blog/vcts-are-a ... lief-avoid

I hold a variety of VCTs and have ISA and pension wrapped investments. If I look at my returns after allowing for the tax bonus then VCTs are the worst performer on a total return basis, and their relative illiquidity also makes then far less flexible than ISA investments.


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