Income investors disenchanted with savings rates and worried by the prospect of 50 per cent income tax could take a look at the secondary venture capital trust (VCT) market, where NVM Private Equity is pointing out that double-digit yields are commonplace.
While investing in new VCT issues offers the best tax breaks - in particular the 30 per cent upfront tax relief, the yield on secondary VCTs remains tax free.
The VCT manager argues that evaluating existing VCTs, then buying shares in them on the secondary market offers the opportunity to buy business assets at significant discounts to their net value and ensures investors can take purchasing decisions based on a published track record.
Another advantage is that VCT shares bought in the secondary market can be sold at any time without crystallising any tax charges - new shares have to be held for five years to retain the initial income tax relief.
Aside from the upfront tax relief on new issues, VCTs are essentially income producing funds. Following a survey of 1,689 shareholders across its seven venture capital trusts, Albion Ventures has found that the feature shareholders ranked most important for a VCT investment was dividend yield, followed by capital growth, and then tax planning and financial security.
The relative attraction of VCTs against other forms of tax shelter were given a major tax boost in the last budget when tax breaks for high earners were made so much worse, in particular the major new restrictions on pension contributions (ie 50 per cent tax, removal of personal allowance and removal of 40 per cent tax relief). This means that investment in VCTs is the largest remaining tax break for high earners.
Albion Ventures believes VCTs are the default tax shelter for high earners going forward - 30 per cent cash income tax relief on investment, access to capital, no tax on disposal of shares and no tax on dividends
However, if you are tempted by the tax-free double digit yields on offer from existing VCTs, note that the market in secondary VCTs is still relatively illiquid, so you need to be aware of the risks and of what you are buying. VCT market makers include www.matrixgroup.co.uk/corporate_capital and www.singercm.com.
TOP 10 GENERALIST VCTS RANKED BY TAX-FREE YIELD*
| Tax-free yield | Discount to NAV | *Total returns over five years (p) | *Share price (p) | Latest published NAV (p) | Date of latest NAV | Latest annual dividend (p) | |
| Proven Growth & Income | 51.00% | -15.10% | 167.8 | 51 | 60.1 | 30 Nov 08 | 26 |
| Albion Techn & General VCT | 23.90% | -24.00% | 115.7 | 67 | 88.2 | 31 Mar 09 | 16 |
| Proven VCT | 21.70% | -23.30% | 135.8 | 45 | 58.7 | 30 Nov 08 | 9.75 |
| Albion VCT | 19.00% | -41.70% | 121.3 | 52.5 | 90.1 | 31 Dec 08 | 10 |
| Albion Development VCT | 17.80% | -17.70% | 147.6 | 67.5 | 82 | 31 Mar 09 | 12 |
| Northern Venture Trust (Ord) | 14.20% | -30.40% | 139.5 | 53 | 76.2 | 31 Mar 09 | 7.5 |
| Eclipse VCT | 13.50% | -2.80% | N/A | 74 | 76.1 | 31 Mar 09 | 10 |
| Foresight 3 | 13.00% | -20.50% | 100.4 | 77 | 96.9 | 31 Dec 08 | 10 |
| Northern 2 VCT | 12.50% | -41.80% | 111.9 | 44 | 75.6 | 30 Apr 09 | 5.5 |
| Matrix Income & Growth 2 | 12.40% | -31.50% | 97.6 | 48.5 | 70.8 | 31 Jan 09 | 6 |
*AIC statistics as at 29 May 2009
Source: NVM Private Equity
