Calculating Return on Investment for Venture Capital Trust Tax Relief

jf20938

I hope this is the correct forum - my question really is based on Saving Tax, so I've gone here.

I think I need a nudge from an Accountant to help me understand how to do this.  I fear this is either embarrassingly trivial or brutally complicated.

If I invest in a Venture Capital Trust, I qualify for Tax Relief of 30% on my investment.  So, as long as I've incurred enough of a tax liability, I can get HMRC to give me a refund up to that amount.

What I'm trying to do it calculate the Rate of Return at that point - i.e. at the start. It initially seems to be a simple calculation. For £100 invested, £30 is refunded so the return on my investment is (£130-£100)/£100 x 100% = 30%. 

HOWEVER, that £30 is available, not at the end of a year, but right at the start (yes, I'm conveniently ignoring delays in applying and HMRC in paying).  So while the calculation above seems intuitively correct for (say) a capital increase of an investment over (say) a year, it surely cannot be the correct calculation if you get the return right away.  Keeping with intuition, the return (refund) at the start MUST be more valuable, because you can invest it over a year and see some return on it too. 

So, how do I calculate a meaningful return on my VCT investment? 

My initial awareness came from reading a post elsewhere (actually a comment about it), that states:

"...I think a point has been missed with the maths, as the tax relief should be deducted from the initial investment. i.e. on day 1 the 'return' is 43% (100/70) not 30% (130/100)..."

My instinct is telling me that 43% is correct but I haven't been able to explain why? Can anybody help?

Thanks,

John.

Post: https://www.finumus.com/blog/vcts-are-a-device-for-fund-managers-to-pay-themselves-your-tax-relief-avoid

Jeremy535897

You might do better here:
https://forums.moneysavingexpert.com/categories/savings-investments

[Deleted User]

Well - I am no genius on this topic but it seems to me that, if an investment with a net cost of £70 is now worth 100, that’s a 43% increase! 43% of 70 is 30.1

jf20938

Yep... as I feared. Embarrassingly simple.

(100-70)/70 x 100% = 42.9% 

Thank you!