Rental properties are one of the most popular investments amongst the Asian Community. Whilst these are generally a good investment, is it not a good idea to diversify? A fall in property values, perhaps combined with increased interest rates, could make property less attractive as an investment. Is it worth considering alternative opportunities such as investments in Venture Capital Trusts (VCTs).
VCTs are listed companies which aim to make money by investing in other smaller new companies that need funding to develop their businesses. Without funding from venture capitalists, many household names would not be in existence. This is why the government offers generous tax benefits to VCT investors.
Both income tax and capital gains tax reliefs are available. In the year of subscription, an income tax reducer of 30% of the amount subscribed is available (up to a maximum £200,000 subscription per year). Furthermore, no income tax is payable on dividends from VCT shares and no capital gains tax is payable on any VCT share disposal. However, the VCT shares need to be held for 5 years to avoid withdrawal of the tax benefits.
VCTs are managed by fund managers who try to minimise risk whilst complying with the rules with which VCTs have to comply. A 5% dividend is a typical target. If that is paid, combined with the initial 30% tax reducer, a £100,000 investor will have had an opportunity cost of £45,000 after 5 years. If the shares are then sold for, say, £90,000, there would be an after tax profit of £45,000.
Given the current property market volatility, now could be the time for investors to diversify their portfolios and put their eggs in more than one basket.
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