Wednesday 22nd May 2019
Investing in a fledgling business can deliver returns and tax incentives, but this needs to be carefully balanced with the risks of doing so. Start-ups might offer high growth potential, but a significant portion of new firms also end up failing, with investors potentially losing their money.
One of the easiest ways to invest in new businesses is through a Venture Capital Trust (VCT). These are investment companies that are listed on the London Stock Exchange and are set-up to invest in particular small or early-phase businesses. These firms need capital to achieve their growth ambitions and have the potential to deliver high returns. However, it’s riskier than investing in companies that are already established.
Despite the risks, investing in smaller companies is growing in popularity. According to HM Revenue and Customs (HMRC) figures, VCTs issued shares to the value of £745 million in 2017/18. The figure represented a 30% increase from the previous tax year and is the highest amount raised since 2005/06. Since the introduction of VCTs in 1995, it’s estimated they’ve raised around £7.7 billion.
While the increasing popularity of VCT capital is partly due to a strong start-up culture in the UK, it’s also due to the tax benefits investors receive, designed to encourage them to financially back riskier companies.
If you’re tempted to invest in VCTs, there are some key things you should know before going any further:
There are many reasons you may be considering using a VCT due to the tax incentives. If you’re a higher earner, for example, your annual pension allowance may be as low as £10,000, limiting your tax saving advantages for retirement. If this is the case, a VCT may provide you with an alternative solution. Of course, there are other options too; have you already used your ISA subscription, for example?
Before making any investment decision, it’s wise to look at your financial situation and security as a whole. To assess which investment vehicle, if any, is right for you. It’s important to answer questions such as:
If you’re looking for ways to grow your wealth and take advantage of tax breaks, please contact us. We’re here to help you assess your financial strategy and how to get the most out of the options open to you.
Please note: The value of your investments can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.