Saving tax, the environment, and the economy!

Traditionally in the UK, one of the biggest aids to starting or growing a business is to own your own house. That’s because in our upside-down economy, you can borrow money on much more favourable terms for an unproductive mortgage than to invest in productive business. So you would use that to finance your startup, or be at a disadvantage.

With house prices crashing and mortgage lending turned suddenly more cautious, that’s no longer the case.  Indeed, if you want to finance a business, you might (almost) just as well tell the bank manager the truth and present a business plan.  Or maybe not the bank manager at all: there are other sources of funding.  With unfair competition[1] from the banks taking a knock, suddenly there’s a whole new niche for venture capital and other such investors.

In the UK, that include Venture Capital Trusts (VCTs), which offer significant tax advantages to investors, in return for investing in unlisted smaller businesses.  The tax breaks reflect the fact that they’re traditionally higher-risk than big PLCs, and that they have low liquidity.  But a VCT, like a unit trust, serves to spread the risk.  I decided some time ago to invest some money in VCTs, towards the end of the tax year.

For those of us who care about “green” issues, a VCT that stands out is Foresight, which specialises in environmental businesses.  I just wrote the cheque to subscribe to their current offer.  That’s three boxes ticked: save tax, save the environment, help small business.  And hopefully a fourth: make good money for me.

I expect I shall subscribe to one more VCT within the current tax year, but I have yet to decide which amongst those with current offers open.

[1] Fractional reserve banking – the bank lends money that doesn’t actually exist, on the premise that it comes into existence as repayments are made.  Works until bad money drives out good and it becomes a pyramid.

Posted on February 17, 2009, in investment, tax, uk. Bookmark the permalink. 4 Comments.

  1. Interesting; I was considering maybe tossing tuppence into the Co-Op’s flagship ethical fund. Will have to consider these folks as well now.

  2. Tim – and anyone else who takes the above as a tip …

    Of course I’m not about to offer financial advice – you must do your own reading of what’s involved in VCTs (in my case, it’s money that would otherwise have gone into the SIPP).

    Just one tip: if you do invest in VCTs, be sure to go through a broker who offers a discount on the up-front charges. Mine (Hargreaves Lansdown – linked in the article) is one such.

  3. “…the bank lends money that doesn’t actually exist…”

    Wow! This is becoming a powerful meme. But it’s a misunderstanding.

    We’ve been discussing this very issue in some detail.

    The truth is a little more complex. Money, or what I prefer to call “leverage” is indeed created, but as a debt/credit relationship mediated by a bank.

    Once created, electronic money in particular must be lent and cannot be destroyed (other than by the originating central bank) or stored, except by cancelling out a debt against a credit. This has certain unfortunate repercussions.

  4. Postscript: I’ve put more into tax-efficient investments than I anticipated at the time I wrote this. That includes not one but three other VCTs, one of which is the pure-play clean energy Ventus fund.

    This year I’m aiming for a rebate that’s within £1000 of the total tax paid, based on maintaining the SIPP, budgeting £25k for VCTs, and at least the amount of whatever bonuses I get (had one in August) in additional charitable contributions.

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