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"Micro cap" trusts/funds seem to be an interesting corner of the UK investment universe (I'm thinking of MINI, RMMC, Downing's fund and new trust; perhaps WPCT too), at least for those with the stomach for the risks.

To what extent is an ordinary UK private investor who buys some shares/units in these things (whether in an ISA/SIPP or unsheltered dealing account) missing out on the sort of reliefs/incentives which they'd be able to claim if they accessed the same underlying "micro cap" world through VCTs or even direct investment in AIM shares? (I am vaguely aware there are some tax advantages - EIS? SEIS? - around VCTs and AIM/unlisted shares, but know little more than that). Could private investors looking for some "micro cap" exposure be significantly better off looking at VCTs (or some other vehicle) than these trusts/fund?

NB This isn't a question about the merits/risks of micro-cap investment, just about the relative efficiencies of ways of accessing that sector.

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    If I recall correctly, the tax benefits of VCTs only apply to the buyer of newly issued VCTs and you must hold the VCT for at least 5 years. You will not get any tax benefit if you buy existing VCT shares or hold them for less than 5 years. So if you are buying a VCT for the tax benefits, you better be certain that you are willing to stay invested for the full 5 years. The benefit is a 30% tax credit for investments upto GBP 200,000 per tax year. – Nick R Apr 30 '17 at 23:23
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Could private investors looking for some "micro cap" exposure be significantly better off looking at VCTs (or some other vehicle) than these trusts/fund?

Yes – because of the tax relief available – on the condition that you're willing to hold them for the required period, and accept the fact they're less liquid (harder to realise your investment when you want to).

The minimum holding period for VCT is 5 years. For EIS it's 3 years.

Both these schemes allow investors in new shares to receive 30 per cent tax relief.

You could sell before then – but you'd have to repay the tax relief.

VCTs can be sold on the secondary market although likely at a discount to NAV (net asset value). Investment trusts by contrast are usually more liquid and their discount may be less (or there may be a premium).

It's true that investors may be able to get greater tax relief by buying Investment Trust shares (or UT/OEIC fund units) through their SIPP. A higher rate or additional rate taxpayer could get relief of 40% or 45% respectively.

However, there is an annual and lifetime limit on the amount of tax relief you can get investing through a SIPP – for a high earner the annual allowance could taper off to as little as £10k. This is another reason many wealthier investors look at VCTs and EIS, which have higher annual limits (£200k and £1m respectively).

And remember you can't get money out of SIPP until you reach 55 (or 58 for younger investors). You could sell your investment within the wrapper but you couldn't get the cash out.

VCT shares also have no tax on dividends or growth.

So of course it depends on your circumstances and which tax efficient options are available to you.

  • Good point about it not really being a choice between VCT/EIS reliefs or nothing... – timday May 19 '17 at 6:15

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