VCTs can offer appealing benefits, but they aren’t for everyone. Here are some of the key risks to consider:
Higher Risk Companies: VCTs typically invest in younger companies that are still in their early stages of development. While these businesses have high growth potential, they’re also more likely to fail compared to larger, established firms. This means that the value of your investment can go down as well as up.
Liquidity Challenges: VCT shares can be harder to sell than those of larger companies, which makes them less liquid. If you need to access your money quickly, you may find it difficult to sell your shares at a fair price. VCTs are best suited to investors who are comfortable tying up their money for at least five years.
Minimum Hold Period: In order to retain the tax benefit associated with VCTs, investors must hold onto these investments for a minimum period of 5 years. If investors sell their shares prior to the 5 years, any upfront income tax relief that has been claimed must be repaid. This makes VCTs best suited for long-term investors who don’t need immediate access to their capital.
Performance Volatility: The performance of a VCT depends on the success of the companies it invests in, which can be unpredictable. While some companies may soar, others may struggle, which means your returns aren’t guaranteed.
Tax Status: If a VCT loses its status, then the tax reliefs described above may be withdrawn. The reliefs from taxation are subject to change with new government policy. Investors are advised to take their own independent financial advice on the tax aspects of their investment.