Remember the risks when investing in VCTs

Venture Capital Trusts (VCTs) offer some good benefits such as a 30% tax rebate, nil tax to pay on dividends and if the shares are subsequently sold at a profit, the gain does not give rise to a Capital Gains Tax (CGT) liability. All very tempting, meaning they can have a valuable place in a portfolio, but remember that VCTs are a higher risk investment and so it is important to look beyond the tax benefits.

First of all, the 30% tax relief is only available once the VCT has been held for five years, making the investment long-term in nature.

As with any trust, the value of a VCT is dependant on the performance of the underlying assets, or companies, it invests in. As these companies are typically small, unquoted or AIM listed businesses, by their nature they are inherently risky, meaning the value of your asset really can go down as well as up!

Quite often the trusts trade at a discount, meaning that the price of the trust does not reflect the underlying value of the assets.

Following on, the same can also be said of any dividend stream the trust provides. An important point if the main reason for investment is income generation.

With the long-term nature of the investment and the trust share price not necessarily reflecting the value of the assets, it is not surprising that the secondary market for such investments is relatively illiquid. This could result in difficulty in selling the holding and/or a sizeable bid/offer spread.