VCTs from my 2017-18 - what has been my experience if I am to sell them now?

[Artistxman]

Hi all

I have posted my dividend gains in the past. I wanted to now do a total calculation based on my current value of the 2017-18 VCTs. As they are all eligible to be sold, this is an useful exercise and I am also keen to hear what people would advice me to do now- recycle or hold them forever?

The list of the VCTs and their gain/ loss by percentage are:

investment investment (sub) Capital and Dividend Percentage gain/ loss

Mobeus Income & Growth VCT plc 50.6
Octopus Titan VCT 2017/18 15.0
Northern VCTs 2017/18 13.0
The Income & Growth VCT 43.1
Baronsmead VCTs 2017/18 -4.8

Capital only Percent loss -21.6

Capital and Dividend Percent gain 21.6

Tax relief 30

Total gain 51.6

Gain/year 10.3

Mobeus is the best performer and Baronsmead is the worst performer even with the dividend returns. In total with the tax benefit I have made 10% ROI over 5 years and ideally we should calculate the ROI based on yearly return(like an eNPV- as the cash has different value as the years pass by). I am relatively happy with my decision except Baronsmead.

So, back to the question if I should sell of them(if it's even possible as I understand I have to wait for the buy back and spend time to recycle/ ensure I don't buy the same ones). Actually how will the HMRC know I am not recycling in the same ones when I am also buying new VCTs from my own cash in addition to the recycled cash? Thank you for the advice and hope the above also helps others who are new to VCTs make their own decision.

[Boots]

I'm another VCT investor, and have sold three holdings after the five year holding period (actually well after, I held them for about twelve years).

My experience was that I offered all three to the market, via Interactive Investor. Two were taken up (Foresight and Proven Growth & Income), but the third was not (Proven). II put it on the Buy Back list. I also contacted the house broker directly (this is typically listed on the VCT website). There was then a wait of many months (my records seem incomplete, but it was about five months) before the buyback was complete. It should be noted that the period was marred by the market turmoil this time last year. In more normal conditions, the buyback might be executed more quickly.

You ask, should you sell? Well, only you can answer that. There are some who believe that one should sell on the fifth birthday of the VCT. Personally I think it is more nuanced than that. I have kept some performance data year by year, and there seems to be a pick up in performance after year 5. I think the optimum time may be to hold for 8-9 years. But my data points are very limited, and therefore almost entirely worthless.

Whilst not relevant to your question, you may want to give some more thought to your performance figures. This is an area I have struggled with myself (I think there is another thread out there on this subject). But I think your calculations aren't quite right. The two points that stand out are: adding the 30% tax relief to your Gross Cost Total Return; and dividing your Total Gain by five to get a per year gain.

If we imagine that you bought £100 of VCT and it had the same performance as you record.

Gross Cost £100
Tax Rebate £30
Net Cost £70

Total Return after five years £121.60

TR / Net Cost over five years £121.60 / £70 = 173.7%, or 74% gain

Annualised gain 173.7% ^ (1/5) = 111.7% or 12% gain per year

Also, you touch on a time value for the money, I find IRR calculations to be a reasonable balance between accuracy and pain (XIRR being too painful).

I hope that's helpful.

[Kidman]

May I make some fairly random thoughts in reply?

First and foremost, I never count the tax rebate as part of the return. This is up to an individual's own circumstances, is nothing to do with the management, and doesn't matter to me when looking at running yield for example.

I think there may be a good argument for selling after five years but then should one sell those that aren't doing well and try to run the winners?

If selling any holding there could be an argument to hold on to a nominal number, say one hundred, shares so as to keep eligibility for existing shareholder benefits in any future offer for subscription, priority application period, loyalty incentive etc.

[Artistxman]

Thank you both, Good points about calculating the return and inclusion/ exclusion of tax. I mainly include tax as I am unable to top up pension and ISA is fully subscribed. But for the true measure of the return- agree and hence it doesn't sound great if someone can still get pension tax relief as that's better and low risk.

In my case, 30% tax relief seems the main benefit and hence recycling(when the market recovers or NAV recovers by year 8-9) may be a better option- that too sell the losers is another great idea. I will ponder all this over the coming days but VCT seems a good investment after exhausting pension, ISA at this point in time(with a diversified VCTs).

The other question I am starting to wonder as well is selling assets(property/company share schemes) to make use of capital gains allowance and reinvesting in VCTs over time so that I don't have a major capital gains burden at disposal and it seems I may be too late already to make use of capital gains allowance(reducing from next tax year). Essentially, shifting taxable assets to a VCT portfolio(or high risk EIS) gradually may be a good option in the coming years if one is a 45% tax payer. I haven't come across any other investment or wealth management tool(other than relocating country). First world problems

[Kidman]

(when the market recovers or NAV recovers by year 8-9)

May I suggest "if" rather than "when" and there is no guarantee that NAV will recover at any particular time, if at all.
There is a history of failed VCTs whose NAV has gone down and down until they were merged into another VCT and often the combined VCT then went down. Hopefully those surviving today are the ones remaining by 'natural selection' and will be better but then look at the reversal in fortunes of that very long-term favourite Baronsmead in recent years.

Don't get carried away by tax relief, it comes at a cost, five year lock-in and increased risk. I have often found that my private equity investment trusts have given me a better net return than my VCTs and they have far less risk and I can sell whenever I want. Granted that when I sell there may be CGT to pay but in the end all that matters to me is that the after everything (income tax, CGT, dealing costs etc), am I making a better net return and at what risk?

A bit off-piste but there is another less well-known tax option.
There is no tax on timber growth. Trees keep growing regardless of the economy and the harvestable timber volume increases. That can then be sold with no tax liability. I have had my own woodlands and invested through forestry funds.
Woodland is also agricultural so potentially exempt from IHT.

(Some eco-nut once questioned my carbon output so I pointed out that I capture plenty more CO2 on my 32 acres than them!)

[Artistxman]

Another great response- you are right the losers will only keep going down and yes it will be a big 'if' with the inflation staying at a higher baseline and high interest rate also staying around 4-5% will mean VCTs if not well run will struggle as any other investments(if they are unable to beat treasury yields). This is purely my predication- I just don't think inflation will come back down to 2% anytime soon/thereby interest rate coming down...may be a decade or longer?

I did wonder a few times when I have gone past woodlands - also up for sale who bought them and why? May be I will loo at the Forestry funds first- without taking this forum completely off topic- where shall I start looking to learn more please? Thanks

[UncleEbenezer]

VCTs can change their fortunes. Baronsmead were consistently The Best performers for many years. Foresight and ProVen have been up and down like yoyos over their lifetimes. And of course the AIM VCTs.

The lesson may be that if something gets too consistent, the rules will change to forbid whatever they're doing. Hence no more VCTs in wind and solar farms, then the clampdown on MBOs.

[Kidman]

May be I will look at the Forestry funds first- without taking this forum completely off topic- where shall I start looking to learn more please? Thanks

I don't know who, if anyone, is offering new funds. The ones I invested in were Scottish and Irish and I think both those companies have closed all their funds or they are in run off. Maybe some of the specialist woodland estate agents could give a pointer?

[Snowbadger]

My personal view , if you have the tax to offset an investment in VCTs recycle and remove the worst performers. In my case it was Baronsmeade this year. I did a post a while back showing my VCT portfolio performance. I had spent several years holding beyond the 5yr period due to my low tax situation but returned to the market when my income changed due to pensions kicking in.
On the subject of forestry, I heard there were liquidity problems such as cost of financing access to monetise said wooden gold.

Good luck

SB