VCTs, SEIS or ISA?

Legacy_user

Is the tax break on VCTs and SEIS or EIS wiped out by having to sell at a discount due to illiquidity, and the high fees? Is there any bonus left after that?

I realise it'd be hard to do unindexed nano cap without high fees though, I think nano cap isn't really my thing anyway but I could be tempted

Reaper

I have some VCTs and do feel both the charges and spreads are outrageous. I would buy more if it weren't for that. However if you plan to hold them long term and benefit from the income then the spread becomes less of an issue.

Beware VCTs that include tax relief in their performance figures - as I think that's a bit of a cheat.

bowlhead99

MatthewAinsworth wrote: »

Is the tax break on VCTs and SEIS or EIS wiped out by having to sell at a discount due to illiquidity

You don't have to sell at any point. You would be holding them for five years at an absolute bare minimum to be allowed to keep the income tax relief, but allowing ten plus would be more appropriate to allow for an orderly liquidation of the portfolio.

and the high fees? Is there any bonus left after that?

No reason why there shouldn't be. Spending 70 and getting 100 of assets (or 100 for 50 in SEIS) together with income tax relief on losses and CGT deferral for EIS/SEIS and no tax on income or gains can be very valuable. Across a broad enough portfolio, investments chosen well will make money.

The availability of tax relief is decent compensation for the risks which would, absent the relief, perhaps be insurmountable for most non-professional investors due to the impracticality of needing a really really broad portfolio to obtain the average return and the large amount of capital that would need to be committed to the risky projects to obtain that.

I realise it'd be hard to do unindexed nano cap without high fees though, I think nano cap isn't really my thing anyway but I could be tempted

Based on previous posts I don't believe you have the patience, understanding, or loss capacity for VCT, EIS or SEIS.

Reaper wrote: »

Beware VCTs that include tax relief in their performance figures - as I think that's a bit of a cheat.

I agree. It is fine to include it in the prospectus by way of explanation of how your personal return should well exceed the scheme or business plan's projected or published IRR or cash multiple, because the enhancement of the raw returns is of course part of my compensation to tempt me into the high risk opportunity. But it should not be a crutch on which the whole performance is built.

There are some VCT schemes whose whole raison d'etre is to grab the tax relief and use it to get a lower risk return where most of the profit comes from the free government money via your own tax return and the VCT manager invests in the safest stuff he thinks he can possibly get away with to technically qualify for the relief. Perhaps with a planned limited life to wind up as soon as the criteria is met regardless of whether the investee business still needs capital or the best possible return has been achieved, precluding the fund from investing in lots of types of opportunities which might take more time to mature.

I am not a fan of many of those structures, which are more engineered with a business plan to cynically grab the free money on offer from the government and move it into the investors' pockets without making genuine investment in risk capital to help real smaller businesses or entrepreneurs get the funding they need to innovate or compete. But I suppose they have a place as a niche part of the industry, and some proponents of VCT will be happy with it as a lower risk end of the spectrum of what's on offer.

joujou

Can you recommend some good VCT/SEIS platforms?

System

Bowl - the time that sale does come, I assume itd have to sell at a 10-15% discount on the secondary market from what I've read

And if fees are say 5%, then even without compounding that's 25%. It all seems to outweigh the initial tax benefit as far as I can see

And even 30% doesn't necessarily beat pension contributions if that's an option, especially for those on child tax credit

.Based on previous posts I don't believe you have the patience, understanding, or loss capacity for VCT, EIS or SEIS.

Understanding probably not, but where there's a will there's a way, its just that I don't have much will for vct or SEIS

Patience and loss capacity I hope I'm proving by religiously buy&holding in my sipp, and I don't do margin because I only speculate what I can afford

Morphoton

I cannot comment on SEIS/EIS but with regard to VCT's I have invested in these in most of the last 13 tax years but have NEVER sold any and do not have any intention of selling in the near future so I am not too concerned with the secondary market. Most of the VCT's I am invested in are yielding around the 5% mark tax free and I intend to use these to supplement pension income starting in 10 years +. I agree with earlier comments that if you are looking to sell immediately after the 5Y anniversary they may not be suitable for you.
For performance you can see this on say Trustnet and compare against more mainstream investments and factor in the tax relief. This will give you a feel if you think the extra charges are worth it.
I would max out pensions / ISAs first before you consider VCTs.

grey_gym_sock

MatthewAinsworth wrote: »

And even 30% doesn't necessarily beat pension contributions if that's an option, especially for those on child tax credit

you probably shouldn't be looking at VCT/EIS/SEIS unless you're already maxing out both pensions and ISAs, and have more money to invest. (and even then, the various allowances allow you to have a fair bit invested unwrapped without paying any tax.)

also, i wouldn't bother with them unless you actually like the underlying investments. personally, i've never gone in for these more obscure tax wrappers, because i didn't much like the underlying investments. (and because it looked like i'd pay nearly as much in high charges as i saved in tax.)

System

5% to me sounds a little lame but I believe in compounding and have a long horizon so go high risk, maybe low risk is appropriate for the life scenario, but you could easily beat 5% in a taxable account with some risk, or consider property where you'll get some capital gains allowance at least

If someone really has so much money that they fill their isa and pension allowances, I can't imagine them really needing to be too tax aggressive, but I suppose what they save in tax gets reinvested and helps the economy

Maybe there are tax free wrappers overseas too?

bowlhead99

MatthewAinsworth wrote: »

Bowl - the time that sale does come, I assume itd have to sell at a 10-15% discount on the secondary market from what I've read

Why does that sale come? What's wrong with taking all the money out of the fund as dividends and capital returned on wind-up.

Also, remember that every 100 pounds received can be reinvested to give 143 pounds in a new VCT issue (i.e. taking 30% income tax relief on the 143 invested). So once your pound has been reinvested about three times basically HMRC has paid for your whole investment.

And if fees are say 5%, then even without compounding that's 25%. It all seems to outweigh the initial tax benefit as far as I can see

Right, if the fees were 5% every year, which they aren't.

And even 30% doesn't necessarily beat pension contributions if that's an option, especially for those on child tax credit

With a pension the money is away for decades. With a VCT it is not locked away, which is very useful, and any of the proceeds reinvested at some point over those decades gets you a double dip of the tax relief.

Patience and loss capacity I hope I'm proving by religiously buy&holding in my sipp, and I don't do margin because I only speculate what I can afford

You have relatively low household income and put most of it into the pension for a decently high rate of tax relief and to stop losing tax credits/benefits. You have relatively low savings.

The minimum subscription to a VCT is £3-£5k. So assuming you were going to invest in VCT you would be looking at handing over a minimum of £6-£10k to buy a couple of them for diversification, and doing that for a few tax years in a row (or every other year) to get further diversification by vintage. If you were looking to have an investment manager allocate money to a portfolio of EISs you would probably need to give them £25k (that was Octopus's minimum before they closed to new investors) and again be able to repeat that so the investments were not all made in one small time window, given the fact that the economic cycle has ups and downs.

So, my contention is that you don't have £6-10k, or £25k, lying around that you can invest every year or two and definitely not need to touch for five years (and EIS may be longer with often zero liquidity), especially in a scheme which may sustain heavy losses. You do not have that loss capacity.

Later in your life when you are not on benefits and are paying a high rate of tax and have a larger pool of capital to deploy and have exhausted most other mainstream avenues to make tax efficient investments, VCT and EIS may become relatively more attractive. They are not pitched at people who don't have high assets or earnings, as the products have a higher risk profile and long term outlook. That's why the annual allowance is £200k or £1m, to accommodate the people who can make use of them.

MatthewAinsworth wrote: »

5% to me sounds a little lame but I believe in compounding and have a long horizon so go high risk, maybe low risk is appropriate for the life scenario, but you could easily beat 5% in a taxable account with some risk, or consider property where you'll get some capital gains allowance at least

Remember a diversified stream of tax free 5% income to a high rate taxpayer is the equivalent of a lot more than 5% gross.

If someone really has so much money that they fill their isa and pension allowances, I can't imagine them really needing to be too tax aggressive,

If you ask most wealthy people how they got and stayed wealthy, it was not because they ignored substantial tax breaks (and tax deferral opportunities e.g. taking the proceeds from an asset disposal on which they owe CGT, and rolling it into an EIS purchase).

Maybe there are tax free wrappers overseas too?

Yes, if you lived overseas there are still investments and tax wrappers offered by different governments. Are you thinking of moving? Not sure the relevance to the thread.

System

Bowl-

Why does that sale come?

On wind up, I assume the secondary market is the only way to release the capital unless there's a buy back

So once your pound has been reinvested about three times basically HMRC has paid for your whole investment.

True but you would've had 3 lots of trying to release that capital, probably at a discount, and 3 lots of at least 5 years of high fees - if those costs cancel out the tax incentive or reduce it then it changes how the product compares

Good points about the fees, 5% was just one number I found, I will have to reassess considering that, and certainly in my situation pension can't be beaten, its true as you say that I don't currently have the necessary to act on these, but I could potentially save it up to be able to - this is an alternative to isa line of thought

If its better than isa I could try to rise to the criteria

. Remember a diversified stream of tax free 5% income to a high rate taxpayer is the equivalent of a lot more than 5% gross.

Definitely, but I was thinking 100% small cap at say 12% typical return in a taxable account, but I suppose taking on risk to compensate for the lack of tax relief is a bummer, but you wouldn't have liquidity problems, and more freedom

Fair point about the wealthy getting there via tax breaks, I just mean there comes a point where you have a practically unspendable amount of money, and stop caring, so rather than trying to make myself a multimillionaire through the sipp I'm now targeting pre-57 retirement via isa/alternative. One man at work told me he was a multimillionaire, but due to health was completely unable to spend it - what's the point in that? Sometimes some rich people volunteer to pay more tax because they believe that's right, its a form of philanthropy to them

But maybe it helps society more if the wealthy can avoid tax, so they can reinvest

I was just wondering if you can use foreign tax wrappers without residency...

bowlhead99

MatthewAinsworth wrote: »

On wind up, I assume the secondary market is the only way to release the capital unless there's a buy back

You assume wrong. If it's winding up why would you have to sell on a secondary market? They are winding it up and disbursing the capital to the owners. That's what winding up is. Why would people buy it from you in a secondary purchase? Who would they sell it on to when it was going to cease to exist?

True but you would've had 3 lots of trying to release that capital, probably at a discount, and 3 lots of at least 5 years of high fees - if those costs cancel out the tax incentive or reduce it then it changes how the product compares

As explained by me and others you don't need to sell out at a discount. If you are more desperate or have already made loads of profit you might be less concerned about a bit of a discount to get the liquidity.

this is an alternative to isa line of thought

It's not really an ISA alternative due to the generally higher risk profile and lock-in to get the generous tax benefits

Definitely, but I was thinking 100% small cap at say 12% typical return in a taxable account

Good luck with that over the long term back in the real world.

Fair point about the wealthy getting there via tax breaks, I just mean there comes a point where you have a practically unspendable amount of money, and stop caring, so rather than trying to make myself a multimillionaire through the sipp I'm now targeting pre-57 retirement via isa/alternative.

Very sensible. You can't take it with you. But when you get to an unspendable amount of money let us know :rotfl:

I was just wondering if you can use foreign tax wrappers without residency...

If you were not a foreign resident you generally wouldn't be paying foreign tax so I'm not sure why you would want a tax wrapper to avoid the taxes you're not paying.

Do you think Canadians want to open UK ISAs so they can buy shares without paying UK tax on their dividends and gains. No, because they don't pay UK tax on their investment returns anyway and a UK ISA wouldn't stop them owing Canadian tax on their profits because a UK ISA only protects you from UK tax.