The Risks Of Investing In A Section 12J VCC
Investing in a Venture Capital Company (VCC) does contain some risk, and it is considered riskier than a listed equity investment. The image below shows the theoretical risk versus return profile for various asset classes. A Venture Capital investment appears on the far right - it is a risky asset class, however greater returns can be expected.
It is also important to note that in general there are two types of risk associated with a VCC investment. There is usual investment risk, but then there is also liquidity risk which investors should also be aware of.
Venture Capital Companies are usually young companies and therefore not yet established. This means hey carry a higher risk of failure compared to more mature businesses. However some of this risk is mitigated by the income tax relief, since, in effect the capital invested is only a percentage of the face value of the investment.
The current Section 12J legislation requires the VCC shares to be held for a period of 5 years in order to make the tax deduction permanent. This means that capital may be tied up while this holding period expires. But in addition to this, even after the holding period, it may not be easy to sell VCC shares at their full value as a willing buyer will need to be found. Purchasers of these "second-hand” VCC shares will not benefit from upfront income tax relief unless the proposal to transfer tax benefits is implemented.