The value of shares in a VCT and dividends paid thereon can fluctuate, so investors may realise less than the amount originally subscribed. In addition, there is no certainty that the market price of VCT shares will fully reflect the underlying net asset value or that VCT shares can be sold at that price. Share buy-back schemes are offered by some VCTs, enabling you to sell your shares back to the fund, usually at a 10%/15% discount to the Net Asset Value.
VCT funds will be used to finance small and medium sized businesses with a relatively high risk profile. Such risks are mitigated by creating a portfolio of such investments. Some of the underlying investments will inevitably fail, some will perform adequately but the principal objective of a VCT fund manager is to make a number of investments which will produce excellent returns for shareholders, more than compensating for losses.
Investors should regard an investment into VCTs as a long-term investment, particularly as VCT shares need to be held for a minimum period of five years to retain the initial income tax relief.
The levels and basis of VCT tax reliefs available to investors may change or be withdrawn at a future date.
VCT status is only maintained if a VCT satisfies a number of continuing tests and there can be no guarantee that this can be achieved at all times. In particular, a VCT must satisfy a requirement that, by the end of a period of three years from raising capital, its investments in qualifying companies represent at least 70 per cent of its total investments. A loss of VCT qualifying status within five years would result in investors having to repay tax reliefs obtained.
Realisation of unquoted company investments may be difficult and take considerable time. Constraints may be imposed on the realisation of investments in order to maintain the qualifying status of a VCT which may restrict its ability to obtain maximum value from its investments. Failures within the portfolio tend to occur early in the life of a VCT and will adversely impact the Net Asset Value. As the portfolio matures and the successful investments increase in value, the Net Asset Value should increase enabling dividends to be paid to shareholders.
Private investors should always seek advice from an independent financial adviser ('IFA') when considering investing in a VCT. The FCA expects IFAs to provide their clients with sufficient information to explain the particular risks of VCTs and ensure a balanced view of investing in such funds.
Click here to find out further information regarding VCTs from HMRC.
Tax treatment will be specific to the individual's circumstances.