Reality check

With two new venture capital trusts pulled from the markets so far this year, and more that could soon disappear, investors in venture capital trusts should seek shares in trusts already up and running.

Martin Churchill, IFA and editor of Tax Efficient Review (www.taxefficientreview.com) says investors in second- hand VCT shares already trading on the public markets do not qualify for 20% relief on their income tax bill for amounts invested in VCTs up to £100,000 annually.

But he adds some VCTs already listed on the stock exchange may be trading at a 20% discount to their investment portfolio's net asset value. This means the 20% 'extra' you would receive on your income tax bill by investing in a VCT at subscription you would pick up anyway by buying the shares off the stock exchange.

However investors should be careful the VCT they choose is not trading at such a wide discount to its NAV simply because it has performed so badly investors are not buying its shares. VCTs are effectively investment trusts with some tax breaks attached.

Investors who buy into VCTs at their issue receive 20% tax relief on their income bill from the amount invested, and can shelter capital gains in them if they invest the gain within 12 months of having made it. The VCT can also pay out dividends and capital gains tax free to the shareholders who bought in at issue.

The difficulty with VCTs pulling themselves from the market having failed to meet their minimum subscription is that, if an investor hoping to shelter a capital gain from tax is also approaching the 12 month cut-off date for investing that gain into the VCT when the trust withdraws, this can leave them with little time to find an alternative vehicle.

Gartmore Premier VCT has been pulled, as has Pathway One VCT. Churchill says ISIS Technology 'must be seriously thinking of following their lead having only raised £250,000 out of the £3m needed to launch the trust and issue shares.

'This action clears the wounded from the battlefield and allows the survivors to battle on.'

So far VCTs have raised £48.6m of the £271.5m they are hoping to raise before closing for new subscriptions. Churchill says Baronsmead and Quester are most likely safely to go on, and so for investors to put money into. Alistair Conn, managing director of Northern Venture Managers, says 'the total funds raised in the 2001/2002 tax year so far is struggling to get past the £50m mark while forecasts for the full year fall anywhere in the range from £100m to £300m, well short of the mark reached a year earlier.'

He says 'stock market apathy and economic recession do not represent the ideal background against which to run a successful portfolio of small unquoted companies, especially when some of the clearing banks are intent on clearing up their lending books by reducing their exposure to those industry sectors perceived as particularly vulnerable.'

He says investors should understand once they have picked their VCT the investment is a long term one, and a 'compelling (strategy) is to stick with a well balanced generalist approach to portfolio management, with a broad mix of industry sectors.