Higher Risk Investments - Are They Right For You?

Now that your core financial planning is catered for and you're taking the right amount of risk for your comfort zone…

…the question you're asking is…

Where else can I invest my surplus cash?

Watch out, because you've just opened the door to a whole new world of investment opportunity.

Whilst we can't go into them all today, we CAN give you a taster so you'll know what's out there. Suffice to say, as many of these types of investments carry more risk than your traditional investments, you really need to do your homework (either on your own or speak to a specialist). You need to be aware right up front that even though the upside potential may be getting your heart racing, the downside can be as low as you can imagine.

The volatility should not be ignored.

Now you're au fait with the risks, let's look at one of these 'investment vehicles'.

Venture Capital Trusts

The VCT scheme was designed to encourage individuals to invest in certain types of small, higher-risk trading companies not listed on the official list of any stock exchange.

VCTs are very similar to investment trusts since both are listed companies, run by fund managers who are generally members of larger investment groups.

Investments in both can be made by subscribing for new shares when a trust is launched or by purchasing shares from other investors once the trust is established. A VCT must predominantly hold the shares and securities of unlisted companies.

Tax Benefits

Up until 5 April 2004 income tax relief was given at 20% on investments of up to £100,000 per tax year in issues of ordinary shares in VCTs. This was increased to 40% by the 2005/06 tax year, and then reduced to 30% since then. In addition, the annual investment limit has been increased to £200,000 for shares issued after 6 April 2004.

The self employed can obtain a reduction in the payment on account if the contribution is made prior to 31st January. Employees obtain this income tax relief by a reduction in their PAYE code. This tax relief gives a significant uplift to an investment. For example, if £7,000 is invested it would have to grow by 42.8% to become £10,000. Effectively, therefore, the tax relief provides an immediate 42.8% investment
return.

The shares need to be held for 5 years for shares issued after 6 April 2006 (formerly 3 years). If they are disposed of prior to this (except to a spouse and not on the death of the investor) relief is withdrawn.
Any dividends received from VCT investments of up to £200,000 are exempt from any additional income tax.

For capital gains tax purposes, tax deferral is no longer available for gains reinvested in VCT shares issued on or after 6 April 2004.
  
Risks

A VCT also has a 5 year holding period for the retention of income tax relief, although it may be difficult for an investor to sell their shares after that time, even though the shares are listed. The demand for existing shares is likely to be quite weak, since the tax relief is only available on subscriptions of new shares, not those bought in the market.

VCTs are inherently ‘high risk’, therefore you need to consider their suitability and how this investment could fit into your overall portfolio. Even though they may have attractive tax benefits this is not in itself reason to invest as they may not be appropriate for your individual circumstances. 
     
Past Performance

Looking back at VCTs launched since 2000, the performance has varied considerably between trusts. This will be due to many factors, one of the main ones being the type of companies the trust is investing in.

The Key Considerations

These higher risk investments can be a useful addition to your investment portfolio.

But be warned.

You simply MUST do your research and homework before you invest and if it doesn't feel right at any stage, take a step back and consider your other options.

Note: If you've not read our latest guide:

'Advanced Investment Strategies'