My use of VCTs as part of retirement planning

jamesd

michaels said:

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. 

The blog posts are OK but contain some issues:

1. They are Venture Capital Trusts, not Venture Capitalist Trusts.
2. You aren't forced to hold for five years but if you sell within that time you have to repay the initial tax relief. If you die your estate doesn't have to repay it.
3. the returns are on the cautious side but that's probably for the best unless it unduly discourages people.

I started out before the latest pension freedoms with the initial idea of using VCT buying to offset the income tax due on my after sacrifice pay. In this approach there's the initial VCT tax relief to cut your effective income tax paid then there's the effectively deferred for five plus years remainder of the purchase price being returned to you, plus or minus the other parts of the investment return and the earlier dividend payments. In effect, VCTs as a deferred pay vehicle to cut your tax bill with some investment performance on top.

If you've the capital to afford the initial purchase price I'd be happy to do the same again - as I'm doing now with pension income - and think that it's reasonable for you to consider it as well.

When the pension freedoms arrived I ceased to need non-pension money to cover years from age 55 because the GAD limit went away so I fairly soon after switched my salary sacrifice to generally take me down closer to minimum wage and mostly took a break from the then-unnecessary VCT buying. Only mostly because I was getting lots of P2P interest and couldn't salary sacrifice that. My main constraint then was ensuring that I had enough money to live on before I reached age 55, which did constrain me a bit from immediately going to minimum wage.

[Deleted User]

jamesd said:

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%.

Total return is  a standard term. You can see Total Return data on moningstar and un Google Finance.  Many investments people hold are within tax efficient wrappers (eg salary sacrifice is far more advantageous) but that’s irrelevant to total return calcs. They don’t multiply their dividends every time they are paid. 

You can certainly monitor your personal returns “gross” and “net” of tax but “total return” means something else. 

jamesd

Yes, it does, and that's part of why I use my actual net purchase price in my calculations, not an inflated one that I didn't in reality pay.

As Forbes explains in the third result of my Google search for the phrase:

"The starting point for calculating total return is basis, also called cost basis. What was the original purchase price of an investment? That’s your cost basis—appreciation above the cost basis is a capital gain (and depreciation from the basis is a capital loss). If you purchase a share of stock for $10 and one year later it’s worth $12, your capital gain is 20%.

Cost basis is only the starting point for total return, however. Next you factor in any income earned by an investment over time, such as dividend payments, interest income, non-recurring special dividends, or capital gains from a fund, among other distributions.

How to Calculate Total Return
To calculate total return, first determine your cost basis for the asset or portfolio of assets in question. Subtract the current value of the investment from the cost basis, add the value of any income earnings."

The initial search definitions for cost basis reflect US law and don't allow for rebates so aren't very useful.

My cost basis is very simple: it's the cash I paid to the share vendor less the rebate I received from HMRC. A rebate is not gross or net of tax, it's a refund of part of my purchase price, with no tax at all included in the pre- or post-rebate price. There's a cap on the total rebate that HMRC will pay, the total tax otherwise payable in the tax year, but that's not related to the price paid for the shares.

Perhaps you'd be inclined to use a rebate deal and claim that your actual cost for something was the cash you initially paid the shop for the item without including the discount you got from the rebate but I'm not. That rebate was a key part of the purchase deal and it needs to be included. Do that in business expenses and you can expect to be fired for gross misconduct.

This issue can also come up in employee share option schemes and it'd be similarly misrepresentative to claim that the actual price paid was the market share price rather than the lower exercise share price. Try that and expect HMRC to penalise you for either income tax or CGT evasion depending on what type of options were involved.

It's inconvenient when comparing with published share charts but it's still the actual return I really received on my actual purchase price. If you fancy using another basis you can look at the published total return charts with the caveat that I wasn't reinvesting dividends in the same shares.

Still, I can understand why you might not like the phrase that can be used in other ways so I've tweaked my initial post and it now only uses that phrase once to say what return as used there isn't.

Lest you think third result was unfairly selective:

1. "the actual rate of return of an investment or a pool of investments over a given evaluation period. Total return includes interest, capital gains, dividends, and distributions realized over a period ... Total return is the amount of value an investor earns from a security over a specific period, typically one year, when all distributions are reinvested" I'd be lying if I asserted that my actual price was market price with no rebate but I didn't reinvest the dividends so that version of their description doesn't work and I don't have data on outcome if I had done that.

2. wikipedia takes the definition from the first

[Deleted User]

Cost basis is also a standard calculation. I do it all the time.  You do account for commissions, etc. No, you do not subtract tax credits.  

I have the right to buy shares in my company at a discount of 12% every couple of months. And I do. When I calculate my cost basis, I account for the full price rather than the price I actually paid. And thats not just to calculate total return but also to calculate taxes.  Tax agencies have rules to define what “cost basis” means. Ok, its not the exact example…

Every time I put money into RRSP, I get back  a tax credit at my marginal rate (51%).  No, I do not multiply my returns by a factor of 2. That tells me nothing about performance of the actual stock. 

Its a standard term and a standard calculation. 

bostonerimus

My US stock index VTSAX has a cumulative return of 128% over 5 years.

deltrotter

Which broker do you use jamesd?

Btw thanks for creating this thread, a very timely read for me as I am in the fortunate position of being pension tapered.

The issue I have, is it worth it as per bostonerimus' post!

Cheers

Del

pip895

I held Unicorn Aim VCT (UAV) for about 7 years.  I purchased it on the second hand market at a nice discount because I didn’t need the initial tax break.  It returned about 130% tax free so pretty useful.   

MisterNick

jamesd said:

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.

I am going to have a go at mine using using your calculation. With VCTs I do generally take account of the tax credit in the overall calculation.

jamesd said;

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

I will report back, but bit busy at the moment
One learning was the Triple Point that did not pay a dividend for the first two years, and has an investment outlook of 7 years. Not a major disaster, but i was thinking of recycling for the tax if I needed it.

I, I suppose like others, am interested to know what Octopus does with money it makes from its Cazoo investment

MisterNick

deltrotter said:

Which broker do you use jamesd?

Btw thanks for creating this thread, a very timely read for me as I am in the fortunate position of being pension tapered.

The issue I have, is it worth it as per bostonerimus' post!

Cheers

Del

Although I didn't get advice as such from my IFA ( outside their scope) they did help on the first two purchases.
The others I did my own research. The Lemon Fool VCT Board was helpful, although I did not contribute.

I started as I couldn't contribute further to my pension and I was facing a large tax bill some in the 60% bracket. (I had ignored it the previous year) It was quite difficult to make a rational decision over the tax saving though, but I am comfortable with going ahead..

MisterNick

pip895 said:

I held Unicorn Aim VCT (UAV) for about 7 years.  I purchased it on the second hand market at a nice discount because I didn’t need the initial tax break.  It returned about 130% tax free so pretty useful.   

Its good getting the tax free dividends through and knowing they are all yours with out reporting to HMRC