Welcome to this Newsflash edition of Insight.

If you would like to discuss any of the subjects raised please contact your existing Origen contact. Alternatively please call Chris Holmes, Head of Professional Connections, on 020 7061 5803.

In this edition

In this edition we focus on Venture Capital Trusts (VCTs) and an interesting concept in ‘recycling’ which has been highlighted to us within the last few days.

Venture Capital Trusts ‘recycling’

Back in 2004, the Chancellor attempted to reignite interest in VCT investment by doubling tax relief to 40% and raising the investment limit to £200,000. Though too late to affect investments in 2003/04, there was a natural surge of interest in these investments in the following tax year.

We are now at the point where, in theory, investors who were attracted by these terms can now realise their VCT investments tax free. However, the Association of Investment Companies statistics show that over the three years to 30 June 2008 the overall return on generalist VCTs has been +10.6%, while for AIM VCTs the corresponding figure is a miserable -20.2%.  

However, these statistics may be misleading as they also include funds with longer track records where their three year performance reflects 2005 market price rather than their original issue price.

It is important that ‘early 2005’ investors who are currently planning an exit should understand that VCT shares are not easy to liquidate and that it is quite common to have a significant spread in share prices. In many cases, the newspaper quoted mid-market prices might be quite different from what the seller actually receives.

One VCT investment company has come up with an interesting means of potentially enhancing returns for investors who are exiting now and would only achieve a modest gain (after allowing for their 40% tax relief).

This VCT is offering to buy shares back from investors at about 1% below their net asset value, provided that the proceeds are immediately reinvested in the Trust. The terms look attractive, even allowing for expenses, for the long term investor. For example, at current values someone with 5,000 shares (original gross cost £5,000 in 2005) could:

• realise £4,033 from a sale at 1% below net asset value;
• reinvest at net asset value with a 2% initial charge;
• receive income tax relief of £1,210 (30% of £4,033) for their troubles.

The investor’s new net holding would be 4,853 shares, i.e. the overall cost of gaining the £1,210 tax relief would be a 3% reduction in their shareholding (worth £113 at the current mid-price). The investor would then have to wait another five years before reaching the end of the new income tax claw back period.

The alternative of selling the shares in the market and reinvesting would be much less appealing, as the trust has a price spread of 10p – 72p bid, 82p offer. In contrast the 99% of NAV offer is worth about 80.7p a share.

VCTs are higher risk investments and the tax considerations should not be the sole reason for investing. The returns to investors are not guaranteed and the value of the investment can go down as well as up. They are medium to long term investments that are not easy to liquidate and potential investors are advised to seek independent advice as to their suitability before committing capital to them. 

This bulletin is purely for information and the content is not investment advice.  This bulletin is based on Origen’s understanding of current legislation, HMRC practice and tax laws. New regulation and products are being introduced all the time. Origen accepts no responsibility for any action taken as a result of this bulletin. An individual should seek independent financial advice about his/her own circumstances.

Origen is a trading name used by Origen Financial Services Limited which is authorised and regulated by the Financial Services Authority.