You may think that the only way to become a millionaire over a short space of time is to play the lottery, but it's possible for a couple to become venture capital trust (VCT) millionaires in just five years. You can invest up to £200,000 each tax year in a VCT and receive up to 30 per cent income tax relief on your contributions (subject to your total income tax bill). You must hold on to the shares for five years to permanently keep the tax rebate. When you eventually dispose of a VCT any gain will be exempt from capital gains tax. Plus you benefit from tax-free dividends as they are paid.
In the tax year just ended, over £400m was raised for investment in VCTs. Most of this money went into traditional VCTs that try to reap the potential rewards of getting in early in the life of a young, dynamic company. These fledgling companies are high risk and offer investors the significant possibility of a capital loss, especially in the early years.
However, just under one quarter of the funds raised last year were invested in planned exit VCTs. These funds are aimed at investors who wish to use the attractive tax breaks offered by VCTs without taking too much risk and make their investment primarily by way of asset-backed, secured loans to small companies.
Eliot Kaye, a director at Puma Investments, says: "A major advantage of these fixed-term loans is that they give VCT managers clear exit visibility on each investment made, and the security taken in the business provides the all-important downside protection for investors. Many of these planned exit VCTs are therefore able to undertake that, after expiry of the requisite five-year shareholding period, they will put a vote to shareholders to put the VCT into a solvent liquidation. Therefore, shareholders in these VCTs have no need to worry about liquidity in the secondary market as investors are effectively guaranteed an exit after five years."
So to make a million you and your partner would each invest £70,000 in a VCT on a yearly basis (£140,000 in total), annually reinvesting the 30 per cent income tax break and all dividends received (tax free). If your chosen VCT(s) give a fairly modest annual return of 5 per cent on the underlying investment, it would take just five years to hit the million pound mark as follows:
Total investment | Rebate | Dividends | Total return reinvested | Total funds in VCTs | |
Year 1 | £140,000 | £42,000 | £7,000 | £49,000 | £140,000 |
Year 2 | £189,000 | £56,700 | £16,450 | £73,150 | £329,000 |
Year 3 | £213,150 | £63,945 | £27,108 | £91,053 | £542,150 |
Year 4 | £231,053 | £69,316 | £38,660 | £107,976 | £773,203 |
Year 5 | £247,976 | £74,393 | £51,059 | £125,452 | £1,021,178 |
| Total | £1,021,178 | £306,354 | £140,277 | £446,630 |
Source: Puma Investments
Some of the best planned exit VCTs are offered by Puma Investments and Downing. Investment analysts at Bestinvest give their highest ranking of five stars to Puma 9 VCT (PUM9) and Downing Planned Exit 2 - G Shares (DP2G).
Although the Puma 9 VCT offer is now closed, having raised £28m, Puma says the fundraising for the next one will probably start in about October, although exact timing and details have yet to be finalised.
Downing Planned Exit 2 - G Shares has still to raise £1.7m to meet its £25m target. This VCT aims to manage risk by focusing on making investments in companies that own and trade from freehold premises, for example health clubs and children's nurseries. It also focuses on companies that operate in the renewable energy sector in areas such as solar and anaerobic digestion and usually benefit from government subsidies.
The VCT scheme started on 6 April 1995. It is designed to encourage individuals to invest indirectly in a range of small higher-risk trading companies whose shares and securities are not listed on a recognised stock exchange. So, if you invest in a VCT, you spread the investment risk over a number of companies.
With the annual pension allowance now reduced to £40,000 and a number of VCTs delivering attractive returns, the latter are starting to gain more prominence in many people's portfolios, including as a useful supplement to a pension.
Read more on the tax advantages of VCTs
