Venture Capital Trusts (VCTs) have now been part of the investment landscape for the last 17 years. In subscribing for shares in these investment vehicles, investors are able to gain a tax advantageous route to invest in venture capital. This article briefly explains the framework for VCTs and some of the recent developments to this framework, especially in light of the Government’s continuing support of VCTs as a way of channelling risk capital into smaller and medium sized companies (SMEs).
Creation and purpose
The first VCTS were launched in Autumn 1995 in an attempt to fill part of the “equity gap” that faced SMEs. The Government’s approach was to offer tax breaks to individual income tax payers as an incentive for them to invest in funds which would, in turn, invest in smaller, developing companies which carried a higher risk profile. As at April 2012, approximately £2.7 billion of funds were managed by VCTs.
Although there have been various changes to the VCT framework over the years (in particular, the amount of income tax relief and qualifying period for this), the fundamental nature of the VCT regime has not changed substantially since its introduction.
What form do VCTs take?
Although labelled “trusts”, VCTs are not trusts but are public limited companies which have obtained VCT status from HMRC, and which have had their shares listed. To date, all VCTs have listed their shares on the London Stock Exchange’s Main Market, although recent changes mean that VCTs can now list their shares on other EU regulated stock markets.
VCTs are managed by external regulated fund managers, most of which now specialise mainly in VCTs and other tax efficient investments. Since they are seeking rapid development, the fund managers take a pro-active approach in providing non-financial support after investment (for instance, business advice, contacts, etc).
What can VCTs invest in?
In return for the tax benefits VCTs and their investors receive, VCT legislation imposes a number of restrictions on the investments a VCT can make, and when.
VCTs cannot trade themselves – they should merely invest in smaller – and inherently riskier – unquoted companies (so-called “VCT-qualifying investments”) with the potential to grow quickly. VCT qualifying investments must be in a trading company (however, certain trades are excluded –the investee company cannot operate nursing home, farming or forestry enterprises, cannot operate in financial services, etc). For the purposes of VCT legislation, however, unquoted companies can also include companies listed on AiM and PLUS markets (subject to the other restrictions being met).
In order to provide its investors with significant returns on their investment, the investment manager will invest in, and further support, a number of investee companies to produce a diversified portfolio of companies, with some VCTs investing in investee companies in a number of sectors (generalist VCTs), others in specialist sectors (e.g. AiM companies, renewables, entertainment, etc). To maintain VCT status, at least 70% of a VCT’s funds must be invested in VCT qualifying investments within three years.
As well as investing in shares, a VCT normally provides some of its investment in the form of loans (typically with some form of security).
Recent changes to VCT-qualifying investments
The Government has been seeking to increase the thresholds on the various size restrictions which are applicable to VCT qualifying investments, and, subject to EU State Aid approval, will increase these with effect from 6 April 2012.
So the limit on the number of employees will increase from 50 to 250, the limit on gross assets immediately prior to investment from £7 million to £15 million, and the limit on gross assets immediately after investment from £8 million to £16 million. The limit on the amount that can be invested in an individual company will also increase from £2 million to £10 million, and the annual £1 million limit on the amount a VCT can invest in a VCT qualifying investment is to be removed.
In addition, to prevent perceived abuses of the VCT framework, a “disqualifying purpose” test has also been proposed, under which an investment will not be a VCT qualifying investment if the investee company has been set up for the purpose of accessing tax reliefs, although the details of how this will be implemented have not yet been published. For VCT funds raised after 5 April 2012, it is also proposed that there be an exclusion on the use of VCT funds for the purchase of shares in another company.
As a result of other recent changes which took effect from 6 April 2012, investee companies which have a permanent establishment in the UK (even though its main trading activities can be elsewhere in the world) are now capable of being VCT qualifying investments. VCTs can also even maintain a listing on other EU or EEA regulated stock markets, and not necessarily a UK one.
What are the tax benefits for investors?
Tax reliefs are available to individuals aged 18 or over who subscribe for “new” shares in the VCT (with more limited tax reliefs applying if VCT shares are purchased from a previous shareholder).
The current reliefs are, in summary:
Income tax relief – Income tax relief at the rate of 30% will be available on new shares up to a maximum investment of £200,000 in any one tax year, or that amount which reduces an investor’s income tax liability to nil. This relief must be repaid should the shares be sold or otherwise disposed of within five years (other than in the event of death).
An investor who subscribes for shares (or purchases existing shares e.g. on the Stock Exchange) up to a maximum of £200,000 of shares in a VCT in any given tax year will not be liable to UK income tax on dividends paid by the VCT on those shares.
Relief from capital gains tax – A disposal by an investor of shares (whether new shares or existing shares purchased from another shareholder) in a VCT will give rise to neither a chargeable gain nor an allowable loss for the purposes of UK capital gains tax. This relief is limited to disposals of shares acquired within the limit of £200,000 for any tax year.
The proposed changes to the VCT framework described above will be implemented within the next few weeks. Since fundraising by VCTs has remained relatively resilient during the financial crisis of 2008 and its aftermath, the Government has continued in its support for VCTs (and its sister, the Enterprise Investment Scheme) as a way of channelling risk capital from retail investors into SMEs to produce the growth the wider economy needs.
This article is a general explanation of VCTs and is not intended to be comprehensive. No action should be taken without obtaining specific advice from an independent financial adviser authorised under the Financial Services and Markets Act 2000.
Ian Scott is a senior solicitor in Howard Kennedy, which has acted as legal adviser and/or FSA regulated sponsor in over 70% of all Venture Capital Trusts (VCTs) launched in the 2011/12 VCT season.
Northern Trust: Outsourcing Accelerates Through Pandemic as Investment Managers Seek to Improve Margins, Enhance Business Resilience, and Future-Proof Operations
White Paper Sees Increase in Managers Outsourcing Middle and Front Office Functions to Achieve Optimal Business Structures
According to a white paper published today by Northern Trust (Nasdaq: NTRS), investment managers of all sizes and strategies have been prompted to undertake a comprehensive review of their operating models as a result of the Covid-19 pandemic which has accelerated existing trends that are compounding cost pressures. This has led increasing numbers of managers to outsource in-house dealing and other functions, such as foreign exchange and transition management, hitherto seen as core.
While cost savings remain a core driver, and indeed are one outcome of outsourcing, costs are no longer the only focus. Far from being solely a defensive reaction to increased pressure on margins, the white paper (‘From Niche to Norm’) describes outsourcing as part of the target operating model, or moving toward the ‘Optimal State’ for many investment managers, and explains how the focus “has expanded to the variety of other potential benefits offered – enhanced capabilities, improved governance and operational resilience.”
Gary Paulin, global head of Integrated Trading Solutions at Northern Trust Capital Markets said: “The pandemic has challenged a range of operational assumptions. Working from home has, for example, questioned the need for a portfolio manager to be in close proximity with the dealing desk. Previously considered essential, the pandemic has effectively forced firms to ‘outsource‘ their trading desks to remote working setups and the effectiveness of this process has disproved the requirement for proximity, in turn, easing the path to third-party outsourcing. Many investment managers are actively considering outsourcing to a hyper-scale, expert provider as a potential, cost efficient solution – one that maintains service quality and, hopefully, improves it whilst adding resiliency.”
Northern Trust’s white paper compares outsourced trading to software-as-a-service stating: “instead of carrying the cost and complexity of running an in-house solution, firms move to an outsourced one, free up capital to invest in strategic growth and move costs from a fixed to a variable basis in line with the direction of travel for revenues.”
Guy Gibson, global head of Institutional Brokerage at Northern Trust Capital Markets said: “The opportunity to deploy capital to build new fund structures, develop new offerings, focus on distribution and enhance in-house research has been taken up by several of our clients to the benefit of their investment approach, and to the benefit of their investors. Additionally, in the last two months alone, many firms have recognized that outsourcing to a well-capitalized, global platform has enabled them to take advantage of cost-contained growth opportunities in new markets.”
A further development, which has echoes of the journey the technology industry has already undertaken, is the move towards ‘whole office’ solutions, which represent the next potential wave in outsourcing.
According to Paulin; “recently we have observed a growing number of managers wanting to outsource to a single, hyper-scale professional service provider who can do everything, everywhere. This aligns with Northern Trust’s strategy to deliver platform solutions for the whole office, serving our clients’ needs across the entire investment lifecycle.”
Integrated Trading Solutions is Northern Trust’s outsourced trading capability that combines worldwide locations and trading expertise in equities and fixed income and derivatives with access to global markets, high-quality liquidity and an integrated middle and back office service as well as other services, such as FX. It helps asset owners and asset managers to meaningfully lower costs, reduce risk, manage regulatory compliance and enhance transparency and operational efficiency.
How are investors traversing the UK’s transition out of lockdown?
By Giles Coghlan, Chief Currency Analyst, HYCM
Just when we thought we had overcome the initial health challenges posed by COVID-19, the UK Government has once again introduced lockdown measures in certain regions to curb a rise in new cases. This is happening at a time when the government is trying to bring about the country’s post-pandemic recovery and prevent a prolonged economic downturn.
This is the reality of the “new normal” – a constant battle to both contain the spread of the virus but also avoid extended economic stagnation.
Of course, no matter how many policies are introduced to spur on investment, traders and investors are likely to act with caution for the foreseeable future. There are simply too many unknowns to content with at the moment.
To try and measure investor sentiment towards different asset classes at present, HYCM recently commissioned research to uncover which assets investors are planning to invest in over the coming 12 months. After surveying over 900 UK-based investors, our figures show just how COVID-19 has affected different investor portfolios. I have analysed the key findings below.
At present, it seems that by far the most common asset class for investors is cash savings, with 78% of investors identifying as having some form of savings in a bank account. Other popular assets were stocks and shares (48%) and property (38%). While not surprising, when viewed in the context of investor’s future plans for investment, it becomes evident that security, above all else, is what investors are currently seeking.
A third of those surveyed (32%) said that they intended to put more of their wealth into their savings account, the most common strategy by far among those surveyed. This was followed by stocks and shares (21%), property (17%), and fixed interest securities (17%).
When asked about what impact COVID-19 has had on their portfolios throughout 2020, 43% stated that their portfolio had decreased in value as a consequence of the pandemic. This has evidently had an effect on investors’ mindsets, with 73% stating that they were not planning on making any major investment decisions for the rest of the year.
Looking at the road ahead
So, it seems that many investors are adopting a wait-and-see approach; hoping that the promise of a V-shaped recovery comes to fruition. The issue, however, is that this exact type of hesitancy when it comes to investing may well slow the pace of economic recovery. Financial markets need stimulus in order to help facilitate a post-pandemic economic resurgence, but if said financial stimulation only arrives once the recovery has already begun, the economy risks extended stagnation.
It seems, then, that there are two possible set outcomes on the path ahead. The first is a steady decline in COVID-19 cases, then an economic downturn as the markets correct themselves, followed by a return to relative economic stability. The second potential outcome is a second spike of COVID-19 cases which incurs a second nationwide lockdown – delaying an economic revival for the foreseeable future. At present, the former of these two scenarios is seemingly playing out with economic growth and GDP steadily increasing; but recent COVID-19 case upticks show that it’s still too soon to be certain of either scenario.
A cautious approach, therefore, will evidently remain the most common investment strategy looking ahead. But investors must remember that, even in the most uncertain times, there are always opportunities for returns on investment. Merely transforming a varied portfolio into cash savings risks a long-term decline in value.
High Risk Investment Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. For more information please refer to HYCM’s Risk Disclosure.
Hatton Gardens 5 top tips for investing in Diamonds
By Ben Stinson, Head of eCommerce at Diamonds Factory
Investing in diamonds can be extremely rewarding, but only if you know what to look for. For investors who lack experience, finding your diamond in the rough can be quite daunting.
For even the most beginner of diamond investors, the essentials are fairly obvious. For instance, you need to ask yourself will the diamond hold its value over time? What’s the overall condition of the stone and the jewellery? Is there history behind the item in question?
Although common sense plays a big part in investing, people often need insider tips and tricks to go from beginner to expert. Tony French, the in-house Diamond Consultant, at Diamonds Factory shares his professional knowledge on the 5 most important things to look for when investing in diamonds.
1: Using cut, weight and colour to determine value
Firstly, consider the shape, colour, and weight of your diamond, as this can play a pivotal role in guaranteeing growth in the value of your item. Granted, investing trends change with time, but a round cut of your diamond will almost always be the most sought after. The cut of your diamond is incredibly important, as it can influence the sparkle and therefore, the overall value. It’s a similar story for the intensity of some colours, such as Pink, Red, Blue, Green etc. Concerning weight, the heavier (bigger) stones will generally increase in value by a bigger percentage. Collectively these factors also contribute to the supply and demand aspect, which will determine their high price, and will ensure your item is re-sellable.
Looking for significant value? Well, aim to own jewellery or diamonds that come from an important public figure. If you’re lucky enough to own a piece that has significant history, or was owned by a celebrity or person of interest, it’s an absolute must to have concrete evidence of this. Immediately, this proof will increase an item’s overall value, and there’s a good chance the stardom of your item might drum up interest amongst diehard fans, increasing the value even further…
Equally, it’s possible to proactively bring provenance to unique diamonds of yours. For instance, you can offer to loan bespoke, or unusual pieces for film, theatre, or TV performances – then it can be advertised as worn by xyz.
3: Find the source
Establishing your diamond’s source is one of the most important things you can do when investing in diamonds. If you’re starting out, try to purchase diamonds that have NOT been owned by too many people, as the overall value of the diamond will reflect multiple ownership. Alternatively, I’d always recommend buying from suppliers like ourselves or other suppliers and retailers, who buy directly from the people who have had them certified.
Primarily, this will allow you to have a greater degree of transparency, which is crucial when buying such a valuable item. Next, you should immediately see an increase in value of your diamonds, as identifying a source will allow traceability and therefore, market context.
Linked closely with my previous point, is the requirement to ensure that your diamonds are certified by a credible lab, and you have the evidence to prove so (a written document with specific grading details about your diamonds) – this will remove any doubts of impropriety.
It’s essential to remember that not all labs are the same, and many labs are better than others. Both the AGS (American Gem Society) and GIA (Gemological Institute of America) have great reputations and are world renowned. I’d recommend doing your own research into the labs, and when you’ve found the pieces that you’d like to invest in, then make an informed decision based upon your findings. Ultimately, proving certification will make your stones easier to insure, and deep down, you can have peace of mind knowing you have got what you have paid for.
Don’t forget to keep this paperwork in a safe location as well – you’d be surprised how many people we’ve met who have lost, or forget where they’ve placed it.
5: Patience is a virtue…
If the market is strong, it might be tempting to look for an immediate sale once you’ve purchased a high value item. However, I suggest holding onto your diamonds for some time before even thinking about selling. More often than not, an item is more likely to increase in value over a few years than a few days – try and wait a little longer!
Equally, I would encourage having your diamonds, or jewellery professionally valued regularly. If you don’t have the knowledge to make a rough judgement on how much your pieces are worth, a consultant or expert can provide both a valuation, and contextualise that amount in the wider market. From there, you should be empowered with the knowledge to decide whether to keep or sell.
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