VCTs are generally for more experienced investors who have already built up a solid ‘core’ of other investments and who fully understand the risks. If you are not sure whether, or which, VCTs might be suitable for you, you should take independent financial advice.
There are three main types of VCT. Generalist VCTs invest in a wide range of companies in different sectors. AIM VCTs invest mainly in companies quoted on AIM or other similar markets. Specialist VCTs invest in particular sectors, such as the environment, infrastructure, media, leisure or technology
VCTs, like all investment companies, are intended as long-term investments. If you are likely to need the money in the near future, you should not invest in VCTs. Remember that, where the initial income tax relief is concerned, you have to hold onto the VCT shares for at least 5 years.
Some VCTs are ‘limited life’ (‘planned exit’), meaning that there is a specific date when the company will be wound up and proceeds returned to investors. Others have no such fixed life and can continue indefinitely.
Managing a VCT takes specialist expertise. For example, the VCT manager has to undertake more due diligence when making an investment. They may even appoint someone to the board of the investee company. When they sell an investment, they need to find willing buyers and negotiate with them to get the best price. This additional work means that VCTs often have higher running costs than other investment companies.
You should speak to an independent financial adviser
As with all stock market investments, when you invest in VCTs your income and capital is at risk and may fall as well as rise. You should not invest in VCTs if you need a guaranteed income or if you cannot afford to lose any of your money. There are also some other specific reasons why VCTs are considered to be higher risk.
These tend to be much more risky than well-established public companies, which may have large cash resources to fall back on in tougher times.
Unlike companies that are traded on public markets, shares in private companies do not have an exact market value. A VCT will use wellestablished valuation methods to estimate the value of any investments they have in private companies, but they can only be estimates. Given the work involved in performing these valuations, VCTs will often only value the portfolio every three or six months and so any valuation may have been calculated some weeks, or even months, earlier.
VCTs have to meet strict tax rules in order to obtain their preferential tax status. If the VCT does not meet these conditions, you could lose your income and capital gains tax benefits.
VCTs are generally smaller than other investment companies and so the amount of shares you can buy and sell at any one time on the stock market will tend to be lower. If you want to sell a large amount of VCT shares, you may have to plan to do this over a longer period of time. Some VCTs also offer to buy back shares to provide you with another way to sell your shares.