A Guide To VCTs
Are you thinking of investing in film? If so, understanding the industry is essential. For example, are you familiar with Venture Capitalist Trusts (otherwise known as VCTs)? They can yield high returns but can be risky too. Familiarising yourself with how they work is recommended if you’re a film investor looking for a new movie project to put your hard-earned money into.
Here’s everything you need to know about VCTs. If you’ve still got questions at the end, contact us for advice. Or, if you want to start investing right away, fill out our short online application form.
What is a VCT?
VCT stands for Venture Capital Trust. VCTs are investment houses listed on the London Stock Exchange. They exist to support small UK-based businesses who meet specific criteria. The Government offers them a range of attractive tax benefits which reflect the level of risk presented by the companies they invest in.
To qualify, the company must satisfy the following HMRC requirements:
- Not all trades are eligible. For example, the HMRC excludes the forestry, farming, hotel, and energy sectors from this scheme.
- The company must be small in scale (250 full-time employees or less) and its assets should not exceed £15 million.
- It must be a relatively new business (most companies benefiting from this funding have been trading seven years or less).
Just as VCTs can only invest in companies that meet specific guidelines, so too must they follow specific rules. For example, at least 80% of the money they raise has to be put into companies that fall into the ‘qualified trade’ category.
How can you invest in VCTs?
Understanding how they work is one thing. But, as a film financier, how can you invest in one? Shares are typically issued by way of a subscription service. The offer remains open until the target has been met or the deadline ends, whichever comes first.
You can also procure your shares via a stockbroker. But by doing this, you would lose many of the benefits mentioned later in this guide. For example, the normal 30% Income Tax rate credit wouldn’t apply.
Why invest in VCTs?
As suggested earlier, you can enjoy a variety of tax benefits. This means higher-risk businesses receive the financial backing they need – instead of being circumvented by financiers worried about losing their hard-earned money.
Income Tax Relief
You’ll benefit from an Income Tax credit of up to 30% if investing up to £200,000 within a twelve-month period. However, a caveat applies, in that you must have paid tax equal to the rebate. You must also hold your shares for a minimum of five years.
Worried about dividends? There’s no need to be. You won’t have to pay any income tax on them either. There’s no need, therefore, to declare dividends on your tax return.
Capital Gains Tax
VCT Growth Potential
As you can see already, a range of attractive benefits exists to entice film financiers to invest in VCTs. But what’s the best way to make your money grow? Understanding these options is important before deciding on your strategy.
What’s a generalist VCT?
Most are generalists. The term normally defines a business that invests its money in unquoted companies. This investment is not sector-specific, meaning it can span a range of industries (including film). Each one works differently, so there is no specific rulebook. One might favour new and growing businesses that show promise. Another might prefer to work with well-established (and less risky) companies already hitting their stride.
How do these investments work? They’re normally transacted using preference shares, loan notes, or both. These provide the VCT with a source of income that’s extremely secure in the event of a wind-up.
It’s not uncommon for VCTs to implant one of their directors on the board of an unquoted company they’re working with. This is good news for you as an investor, because your investment will be overseen by an expert who’ll coordinate the eventual sale of shares to an investor or trade buyer.
What is an AIM VCT?
AIM is a specific part of the London Stock Exchange built for smaller growth businesses. The managers at an AIM VCT will have a deep understanding of fund management. But they will be less familiar with, say, private equity investment. In direct contrast with a generalist, they will ignore preference shares or loan notes in favour of ordinary shares.
You need to know that the value of ordinary shares can fluctuate. This inherent instability can put off more risk-averse investors. But some are attracted to their flexible nature, as they can be sold more easily on the market.
Each of these approaches has its own unique set of benefits and disadvantages. Neither one is ‘right’ or ‘wrong.’ If you’re a less experienced film investor then, arguably, generalist VCTs offer a lower level of risk.
What is a specialist VCT?
A specialist, as its name would suggest, focusses on a specific sector. For example, healthcare, manufacturing, media, or film. This places it in direct contrast with a generalist working across a variety of industries. The benefit here, of course, is that the VCT understands its niche area very well, arguably making it more adept at recognising trends and avoiding risks.
Because a specialist’s portfolio is less diversified, your level of risk is higher. Look at what’s happening to the retail market at the moment. Can you imagine what would have happened to your money if you’d invested in a VCT specialising in this sector?
What other options do you have?
If you’re not sure whether investing in a VCT is the right option for you, but you’d like to support startups and SMEs in the UK, then have a look at the EIS and SEIS schemes. Rather than investing in a VCT which will then distribute your money itself, you can invest in one company (or film production company), so you have more of a direct link to the positive effects of your investments.
As you’re investing in relatively small businesses, you will get attractive tax benefits as well as loss relief in case it doesn’t work out. Read more about EIS and SEIS here.
Films4U Can Help
With 100 years of experience in the film industry, we’re perfectly positioned to help you take the next step in investing in an EIS-eligible film production company. Drawing on the strength of our knowledge and relationships, we’re able to launch start-up companies and provide many exciting and profitable opportunities for film investors.
Rather than going it alone, take the next step with us today. We have decades of experience investing in the film sector, and we haven’t lost money on a film yet.