Anybody subscribing to the VCT offers at the moment...

[scotia]

I have been dithering for some time, but, with a bit of prodding from my wife, we have decided, after 15 years of VCT subscriptions, to cease further new VCT purchases, and our DRIS mandates have been rescinded.
Why? Well, partly because the performance has deteriorated since the last major change in VCT regulations, and partly because, being both in our mid-seventies, we think it is time to simplify our financial affairs. And we will gradually sell off the 5-year expired VCTs. Already Artemis and Chrysalis have got there before us!
We'll miss the Tax rebates

Scotia, I have no intention of offering financial advice and you make a good point on performance. However VCTs are pretty simple to administer, no tax, no tax returns, no CGT issues and can be passed to surviving spouse or descendant with all these tax benefits continuing (if below £200k per recipient). Tax relief claimed on purchases inside 5 years is not clawed back on death. However VCTs are no exempt from IHT.

This appears to be different to EIS where while tax relief on purchase inside 3 years is not clawed back, but on transfer to surviving spouse or descendant CGT relief and income tax loss relief is not passed on. It is likely that EISs held for more than 2 years may fall outside IHT.

DYOR

Many thanks for the comments.
I said I was dithering - so the pros and cons are not 100% in either direction. But we are getting older, and simplification for ourselves (and potential inheritors) makes some sense. And with the ISA level now raised to £20,000 each, and further offloading to potentially exempt transfers, there is no longer a need to consider VCTs for any surplus funds. So unless there was a significantly better performance by VCTs vs conventional investments in an ISA, then VCTs are no longer attractive. And an additional annoyance with VCTs has been the sale of certificated shares (to maximise the tax gain from 5 year holdings) - first Charles Stanley Direct introduced whopping charges, and now Hargreaves Lansdown seems to be problematic. I.E. more nuisances which we could well do without.
So we will grin and bear our tax bills this year - making a very small contribution to the amount that the chancellor will need to raise.

[nellybee]

Hi,

I am curious to know more about why you say " I am not particularly keen on Octopus and Foresight"? I am completely new to VCTs and was thinking of investing in the Foresight one so am keen to hear more.

I should also explain one of my main reason for considering VCTs is to reduce my tax burden.

many thanks for any tips/thoughts.

[UncleEbenezer]

Hi,

I am curious to know more about why you say " I am not particularly keen on Octopus and Foresight"? I am completely new to VCTs and was thinking of investing in the Foresight one so am keen to hear more.

I should also explain one of my main reason for considering VCTs is to reduce my tax burden.

many thanks for any tips/thoughts.

Foresight went through a very bad patch a few years back. Not everyone has forgiven them. The record is also incomplete: the worst - Foresight 2 and 3 - got merged into F1 and F4 respectively, so you'll struggle to find all the history.

There were also some other questionable actions, such as the process by which Acuity was merged into F4 (Acuity had been a real disaster under other management, and merging into Foresight was a rescue), and some governance issues.

As for the troubles, they arose largely from an ill-timed foray into lots of environmental investments, which faced huge headwinds in the Cameron era. My investment in IEM (an environment specialist IT) also struggled and was underwater for years at the time, and Foresight's environmental VCT investments - being inherently a higher risk profile - were largely written off.

[scotia]

Getting back to my reasons for giving VCTs a miss this year, I stated, that in my present circumstances (which I described)

So unless there was a significantly better performance by VCTs vs conventional investments in an ISA, then VCTs are no longer attractive.

My inference was that purchasing small-cap open-ended funds in an ISA may be (in my circumstances) an alternative to VCTs. So I thought it would be worthwhile looking at the relative performance by Investment Management groups who manage both VCTs and small-cap funds. I have compiled below data extracted on 26/1/21 from the Hargreaves Lansdown site. The figures are total returns based on the bid price over 1,3 and 5 years. They take no account of the tax return or the initial higher cost of new issue VCTs. I have checked the numbers - but any corrections would be welcome. I should add that I prepared this note a few days ago, but it looks like I failed to press the appropriate button, and I couldn't find it on the LMF site. Hopefully it will work this time.











Looking at the 5yr performance, for each management team, except Amati and Unicorn, their open-ended funds have performed better than their VCTs with an out-performance which appears to have exceeded the tax benefit. For Unicorn, the difference between the VCT and the fund was negligible - but this VCT usually runs at a considerable discount to NAV, so reducing the effective tax return on a 5 year sale. For Amati the VCT was superior, but both it and the fund displayed impressive performance (I happily own both ).

But past performance is no guarantee of future performance. I remember when Baronsmead VCTs and Octopus Titan VCT were very high fliers.

[UncleEbenezer]

So I thought it would be worthwhile looking at the relative performance by Investment Management groups who manage both VCTs and small-cap funds. I have compiled below data extracted on 26/1/21 from the Hargreaves Lansdown site.

Thanks for that snapshot (I take it all those numbers are total return?). Interestingly inconclusive overall, though it broadly supports my thought that if I buy any VCT this year it should be generalist - which are rather down - rather than AIM which are flying high just now.

(I was disappointed to miss Albion's early bird price while trying to correspond with them on establishing my status as existing shareholder).

One point: the way I calculate my VCT returns is based on the price I pay after tax rebate. So looking at the AIM VCTs, a 5-year performance of 60% is a return on my net cost of (160/0.7 - 100) = 129%. Obviously that, like your figures, is without some lesser adjustments or discounts/spreads. And of course it's a one-off: the longer you hold, the more that benefit gets diluted.

[smose]

QUOTE FROM CRAIG - But we are getting older, and simplification for ourselves (and potential inheritors) makes some sense. And with the ISA level now raised to £20,000 each, and further offloading to potentially exempt transfers, there is no longer a need to consider VCTs for any surplus funds. So unless there was a significantly better performance by VCTs vs conventional investments in an ISA, then VCTs are no longer attractive.

When I initially started investing in VCTs way back in 2013, it was to reduce my tax burden, having exhausted the ISA (for both me and partner) and SIPP (which has since been further curtailed on high income individuals to 10000 pounds/year). I am thinking of retiring in the next year or two, but am finding that I still needing to continue building for retirement.

Over the years, I have invested in AIM VCTS (Hargreave Hale, Unicorn and AMATI - in that order of size), and less in Mobeus and Maven VCTS. I took advantage of DRIS whenever offered by these VCTS.

On reviewing of my portfolio, I find that the dividend from these VCTs will form a large part of my retirement income. The advantage will be unlike 'annuity or revenue from income drawdown and other sources', dividend from these VCTs and ISAs will be tax-free. The disadvantages are the monthly revenue needs to be managed and will be choppy, plus the performance is un-guaranteered.

So far, the AIM VCTs have maintained annual dividend of 5%, whilst maintaining their value (performance having improved in 2020 after poor performance particularly for HH, Amati having the best performance in 2020). Due to the poor liquidity for Unicorn, instead of re-cycling (to another fund), my thoughts are that I should keep them as 'permanent' cornerstone of my portfolio, beyond the 5 years.

I will continue to invest in VCTs and my current favourite is Amati.

DYOR
Smose

[scotia]

So I thought it would be worthwhile looking at the relative performance by Investment Management groups who manage both VCTs and small-cap funds. I have compiled below data extracted on 26/1/21 from the Hargreaves Lansdown site.

Thanks for that snapshot (I take it all those numbers are total return?). Interestingly inconclusive overall, though it broadly supports my thought that if I buy any VCT this year it should be generalist - which are rather down - rather than AIM which are flying high just now.

(I was disappointed to miss Albion's early bird price while trying to correspond with them on establishing my status as existing shareholder).

One point: the way I calculate my VCT returns is based on the price I pay after tax rebate. So looking at the AIM VCTs, a 5-year performance of 60% is a return on my net cost of (160/0.7 - 100) = 129%. Obviously that, like your figures, is without some lesser adjustments or discounts/spreads. And of course it's a one-off: the longer you hold, the more that benefit gets diluted.

Yes - the figures were total return, bid to bid. And that's where another very-variable factor comes into any calculations. For the open ended funds listed, the bid price is equal to the offer price - so the total return is an accurate estimate. But for the VCTs, when purchased as new issues, the purchase cost is normally NAV plus a few percent, and the bid price can be substantially lower. I think we both know that Unicorn AIM VCT is a substantial offender in this area. E.G. the last quoted NAV (31/12/20) is 204.5, and the current Bid price is 173p. Now removing the dividend of 3.5p (due 11//2/21) then 201p is probably the current (ex div) NAV. The current offer will be at NAV plus 2.25% (from a discount broker), so you will pay 205.5p for a share at a bid price of 173p. I.E. the 30% tax return is approximately halved.
But as you say, all interestingly inconclusive. However my wife - I think wisely - believes that the time has come (in our mid seventies) to simplify our affairs, and so we will stop accumulating VCTs, and will gradually wind down our current holdings

[scotia]

Due to the poor liquidity for Unicorn, instead of re-cycling (to another fund), my thoughts are that I should keep them as 'permanent' cornerstone of my portfolio, beyond the 5 years.
I will continue to invest in VCTs and my current favourite is Amati.

Yes - as you will see in my response to UncleEbenezer, Unicorn is an annoyance - its probably logical to sell our Unicorn AIM shares now they are beyond the 5 year hold, but there is a certain reluctance to sell them at a 20% discount to NAV.

[smose]

Does anyone else use dividends from VCTs as a major source of income for when they retire?

[onslow]

Due to the poor liquidity for Unicorn, instead of re-cycling (to another fund), my thoughts are that I should keep them as 'permanent' cornerstone of my portfolio, beyond the 5 years.
I will continue to invest in VCTs and my current favourite is Amati.

Yes - as you will see in my response to UncleEbenezer, Unicorn is an annoyance - its probably logical to sell our Unicorn AIM shares now they are beyond the 5 year hold, but there is a certain reluctance to sell them at a 20% discount to NAV.

Scotia isnt their an arbitrage opportunity here - sell your current holdings even with the 20% discount to NAV & buy the in the next Unicorn offer with the 30% tax relief?

Am I missing something or is it really that easy?!?!

(for this and other VCT holdings - I've got quite a few coming up to 5 years later this year!)

[Meerkat]

I'm currently researching VCTs, and have been through the various threads on this forum, to get up-to-speed.

Does anyone have an opinion about whether the tax advantages of a VCT (EIS as well, I guess) are at risk from revision/adjustment with the Government rumoured to revise/increase CGT etc.?

5 years post-Covid is surely a rather long period to be optimistic about no change?

[scotia]

I'm currently researching VCTs, and have been through the various threads on this forum, to get up-to-speed.

Does anyone have an opinion about whether the tax advantages of a VCT (EIS as well, I guess) are at risk from revision/adjustment with the Government rumoured to revise/increase CGT etc.?

5 years post-Covid is surely a rather long period to be optimistic about no change?

About 15 years ago the VCT tax return was reduced from 40% to 30%, and the hold period was increased from 3 to 5years. Then more recently the government banned VCT enhanced buy backs, and restricted the investments in management buy outs. I.E. if the government considers that VCT investors are getting too good a deal, they will change the rules. With the need to repair government finances, I suspect there will be a tightening up of tax give-aways (e.g. ISA limits and CGT), so I don't think VCTs will be exempt from such actions.

[scotia]

Due to the poor liquidity for Unicorn, instead of re-cycling (to another fund), my thoughts are that I should keep them as 'permanent' cornerstone of my portfolio, beyond the 5 years.
I will continue to invest in VCTs and my current favourite is Amati.

Yes - as you will see in my response to UncleEbenezer, Unicorn is an annoyance - its probably logical to sell our Unicorn AIM shares now they are beyond the 5 year hold, but there is a certain reluctance to sell them at a 20% discount to NAV.

Scotia isnt their an arbitrage opportunity here - sell your current holdings even with the 20% discount to NAV & buy the in the next Unicorn offer with the 30% tax relief?

Am I missing something or is it really that easy?!?!

(for this and other VCT holdings - I've got quite a few coming up to 5 years later this year!)

In the past I usually sold the VCTS at the 5 year duration, and the proceeds were re-invested in more VCTs - so effectively harnessing the 30% tax return. But if the bid price (at which I sell) is at a substantial discount to the NAV (above which which I need to buy), then I lose a significant amount of the tax return. So if I were currently re-investing VCT cash (whether from Unicorn or other VCT), I would go for a VCT which has implemented a decent discount control - probably in the 5% to 10% range. Unicorn show no signs of doing so.

[UncleEbenezer]

For what it's worth, Unicorn is one of my biggest holdings. Helped by capital growth, while most VCTs decline over time. I certainly expect to hold and benefit from the income for the foreseeable future.

Note that things change. For quite a few years (before the merger, so prices not comparable to today's), Amati's quoted price might've been a 50p-90p spread. And its recent stellar performance is in part a reversion from having declined substantially, and its dividend cut has yet to be restored. In the other direction, Baronsmead ain't what it was and it lacked liquidity when I was raising money for the house purchase (spring/summer 2019) - though I still hope for a turnaround.

On another "things change" note, I also happen to hold Herald Investment Trust, which pays no dividends and was at north of 20% discount when I first invested. The post-covid rising tide of yet more newly-printed money has narrowed that discount to 7%.

[Kidman]

Does anyone else use dividends from VCTs as a major source of income for when they retire?

I stopped work 20 years ago although I didn't like saying I was retired as I was 50. Since then my main income has been investment trust dividends and some direct company dividends. Both took a bit of a knock in 2020 but I didn't have so many spending opportunities!

I have put a small amount into VCTs nearly every year since they started until recently and sold quite a few of them over the years. That has left me with a few larger holdings which contribute around 7% of my dividend income. I see that as about right for their risk profile.
Over the last decade I have increased my alternative investments through introducers which can also be volatile but on average give me a higher after tax return than VCTs. I am happy to pay tax and I am happy to pay higher fees, what matters is what I get out of an investment net of everything, and taking risk into account.