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VCTs provide a valuable source of capital for small companies and so help the UK economy to develop. There are also considerable tax advantages offered to investors in new VCTs. They offer suitable investors a tax-efficient way to put money into new opportunities that may bring a high return. While we recognise the potential benefits of VCTs as an investment opportunity, it is important that investors who acquire VCTs have a clear understanding of the risks as well as the benefits associated with investing in them. Important risks associated with investing in VCTs are set out below.
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Limited secondary market:
The secondary market for shares in VCTs is limited and as a result shares in VCTs can trade at a discount to the net asset value. To partially address this issue, some VCT Managers offer a 'Buy Back' facility normally at a discount to the net asset value.
Type of company invested in:
VCTs are designed to provide capital for small companies and each VCT will invest in several companies. As such, there is a risk that these companies may not perform as hoped and in some circumstances may fail completely.
Where the 30% Non Qualifying Investments are invested:
Traditionally, VCTs have invested the 30% Non Qualifying Investments in money market securities/gilts/cash deposits etc. We are aware that a few VCTs have invested part of the 30% Non Qualifying Investments in more risky investment vehicles.
Withdrawal of tax breaks:
The generous tax breaks are one of the major attractions of VCTs. If the investment is not held for five years or if the VCT does not invest 70% in qualifying investments after three years, the initial tax breaks can be withdrawn.
Long-term nature of the investment:
Generally, VCTs are considered to be long-term investments.
Charges and performance fees:
The levels of charges for VCTs may be greater than Unit Trusts and Open Ended Investment Companies.
Security of capital:
As with any asset-backed investment, the value of a VCT depends on the performance of the underlying assets. The value of the investment and the dividend stream can rise and fall. So the investor may get back less than they originally invested, even taking into account the tax breaks.
Further risk factors.
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