My use of VCTs as part of retirement planning

jamesd

Around six years ago I started mentioning VCTs here as a potentially useful tool in retirement planning and one that I have been and am using for that myself. Five years on from the second purchase it's now worth looking to see how well or badly things turned out. The primary one I mentioned was the Albion Venture Capital Trust (AAVC) but I personally also put a little into the others operated by Albion. Here's how they did:

AADV: return +119%: dividends 56% of cost, capital +64%
AAEV:  return +125%: dividends 52% of cost, capital +73%
AATG:  return +85%: dividends 60% of cost, capital +25%
AAVC:  return +92%: dividends 87% of cost, capital +5% <-- the one I mentioned
CRWN: return +108%: dividends 63% of cost, capital +45%
KAY: return +111%: dividends 51% of cost, capital +60%

The total amount I've received in dividends over the years is 83% of my after tax relief purchase price and the total capital value of the shares is 112% of the after tax relief purchase price. I anticipate that in another few years I'll have received dividends equal to my original purchase price. For those who don't know, VCT dividends are tax exempt and they are also exempt from capital gains tax. I wasn't reinvesting dividends into the same VCT and the return is the sum of the change in the price after rebate from HMRC that I paid and the dividends received. It's the total of all returns in all forms but you won't be able to look at a total return chart to compare because those don't include the rebate effect and assume reinvestment.

These were intended originally as staid asset-backed investments that would have relatively low for VCTs risk of loss and fairly reliable return of capital mainly via dividends after getting the tax relief. They have delivered better than I anticipated.

I continue to use VCTs as part of my retirement planing and am currently using VCT purchases to largely remove the income tax bill while removing my full basic rate band from my pension pots, something I intend to continue until it becomes credible for me to withdraw the remaining balance within my income tax personal allowance, though it's possible that there will be gaps to ensure that my money remains invested tax-efficiently. This is part of a plan to gradually make then keep as much of my income as possible tax exempt. Growth and added money in other assets means that the VCTs are still worth less than 10% of my total investments.

Changes to VCT rules mean that VCTs are no longer allowed to make asset-backed investments and these have now transformed into more traditional technology focused investments with a higher risk expectation. You can't get the expectation or results that I saw by buying them today.

I described them as staid but if you look at the NAV and share price for AAVC in 2021 you might be surprised by that. The VCT sold the care homes that were a significant part of the NAV for a substantial profit then announced that a special dividend would be paid to current shareholders and moved the shares to ex-dividend (buy after announcement and you won't get that special dividend). With much of the care home value going into investor's bank accounts and the NAV accordingly reduced both the NAV and share price adjusted to reflect the new value, which hurt the holders not at all because of their pending swollen bank accounts. Paying much of the proceeds of investment exits as special dividends is common practice for VCTs.

Edited to add capital performance breakout and correct a too low error in AAEV current value. Its return increased from 76% to 125%, total capital value now changed from 110% to 112% of purchase price, 12% gain. AADV dividend rounding error corrected from 55% to 56%. Rounding means capital gain and dividends don't add together to make  the return total always.

zagfles

Is this why care home costs have risen so much?

jamesd

Not these three, they were newly built and in the higher priced luxury part of the market. A bit of extra supply.

MisterNick

James

Thanks for the info.

I was trying to compare to my portfolio, and wondering how you got to your total return figure.

For the current value are you using the NAV less (say) 5% as it is difficult to sell them on the open market or the share price?

Is the calculation then; current value plus dividends paid to date, plus tax relief, less price paid?

For info my purchases have been;

March 2017 (large proportion of portfolio)

• Octopus Titan
• Triple Point Income “E” shares

March 2018

• Maven 3
• Maven 4
• Hargreave AIM

March 2019

• Unicorn
• Proven VCT
• Proven G & I

Many thanks

michaels

Is there a link that explains how this works for beginners?

At the moment I am using sal sac which means I also save on NI and get a share of employers NI but this imposes other limitations (including AA) and may lead to LA in not too long - plus as a couple 95% of the pension provision is in my name.  No risk of higher rate on the way out but still a lot will be 20% rate.  It may make sense for me to look at doing 2 year where I maximise earnings if VCTs were to prevent this just turning into a way of boosting the treasury for very little personal gain. 

Alexland

michaels said:

Is there a link that explains how this works for beginners?

I found this 4 part blog series useful for building up VCT knowledge however decided against using them as they don't provide the same inheritance tax benefits as pensions (or even AIM portfolio services) but everyone has different priorities. The test is if you can get your head around the cashflow graph in part 3.

https://gentlemansfamilyfinances.wordpress.com/2020/07/13/vcts-for-fi-part-1-intro/

https://gentlemansfamilyfinances.wordpress.com/2020/07/24/vcts-venture-capitalist-trusts-part-2-buy-hold-sell/

https://gentlemansfamilyfinances.wordpress.com/2020/07/31/vcts-for-financial-independence-part-3-making-it-work-for-you/

https://gentlemansfamilyfinances.wordpress.com/2020/08/21/vcts-for-financial-independence-part-4-my-own-experience-over-7-years/

jamesd

MisterNick said:

I was trying to compare to my portfolio, and wondering how you got to your total return figure.

For the current value are you using the NAV less (say) 5% as it is difficult to sell them on the open market or the share price?

Is the calculation then; current value plus dividends paid to date, plus tax relief, less price paid?

For current value I'm using the share price as it was on on Sunday, the latest available, not the NAV.

Purchase price is actual price paid minus the 30% initial tax relief.
Value is total of all dividends received, without inflation adjustment, plus latest available share price.
Total return is (value minus purchase price) all divided by purchase price and expressed as a percentage.

All of them operate share buyback policies at reasonable discounts but there would probably be a five to ten percent of NAV loss in capital price from using that. One of the attractions of returns as dividends is that you end up getting most of the returns paid to you without any deduction.

MisterNick said:

For info my purchases have been;

March 2017 (large proportion of portfolio)

• Octopus Titan
• Triple Point Income “E” shares

March 2018

• Maven 3
• Maven 4
• Hargreave AIM

March 2019

• Unicorn
• Proven VCT
• Proven G & I

Many thanks

You did better than I did in your subsequent year buying, I think.

[Deleted User]

Purchase price is actual price paid minus the 30% initial tax relief.
Value is total of all dividends received, without inflation adjustment, plus latest available share price.
Total return is (value minus purchase price) all divided by purchase price and expressed as a percentage.

Total return calcs should not credit tax relief in the purchase price. 

[Deleted User]

Here is total 5 year return for AADV vs S&P 500. Does not seem to align with the OP. What am I missing? 

jamesd

Deleted_User said:

Purchase price is actual price paid minus the 30% initial tax relief.
Value is total of all dividends received, without inflation adjustment, plus latest available share price.
Total return is (value minus purchase price) all divided by purchase price and expressed as a percentage.

Total return calcs should not credit tax relief in the purchase price. 

They should because the tax relief reduces the effective purchase price by 30% and that's very important in understanding how the investment really works.

Fail to do that and you might not realise that say say 6% dividends per share based on full price are closer to 8.6% based on price paid and that could result in misunderstanding of the true value of those dividends vs competing alternatives.

For AAVC there were eleven dividend payments of 5.0% of my discounted purchase price being paid twice a year so I was seeing 10% a year in dividends based on the price I actually paid. Starting in January 2021 they switched to variable dividends due to the change in the underlying nature of the investments from interest-paying and asset backed that provides a less consistent income stream for the VCT. With the special dividend after the care home sale 2021 has paid 37%.

jamesd

Deleted_User said:

Here is total 5 year return for AADV vs S&P 500. Does not seem to align with the OP. What am I missing? 

This one isn't claiming to be total return. My after tax relief purchase cost for the AADV shares was £0.5279 and the price I see as I write this is £0.8650, a capital gain of 63.86% which rounds to the same 64% I gave in the original post.

The charts won't reflect the tax relief effect on the purchase price so they will understate the total capital gain. If you'd like to recalculate it's apparent that if £0.5279 is 70% of the purchase price, the purchase price before tax relief was £0.7541 and the gain vs that inflated price is 14.71%.

Since the chart shows around 30% gain in value based on undiscounted price it looks as though it's including at least some of the dividend value and the remaining difference will be the longer time period for which I held those shares.

Of course if you don't like me want to use the actual effective purchase price you need to add the tax relief into the return calculations in some other way, and preferably one that reflects its arrival very early in the holding time. But using discounted purchase price is simple and a better reflection of the reality of the price actually paid for the shares and whether it's produced a capital gain in the price or not.

My own numbers are based on price actually paid (which includes commissions and other deducted costs), shares delivered, actual share price, actual tax relief and actual dividends received in my bank account with statements reviewed before posting.