Go for quality when investing, not just the tax advantages

What matters most: the tax status of an investment, or its quality? You might think the answer is obvious. But that hasn't stopped large numbers of people putting money in risky, but potentially tax-advantageous products, rather than simply in good investments. Some are regretting it this week.

First up in the regret stakes will be anyone who piled money into the Oxford Technology venture capital trust (VCT) and Oxford Technology 3 VCT in the last couple of years. The funds hold shares in Scancell, an Aim-listed vaccine firm.

A sharp rise in the share price took the value of the funds' total holding to more than 15% of the VCTs' funds. As that breaches VCT rules, the tax office has removed their VCT status. The result? Oxford is appealing.

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But if that doesn't work, its investors "could be exposed to large tax liabilities". They'll lose any income-tax relief gained from investing in the VCTs in the last five years, and have to pay income tax and capital gains on their returns.

But they won't be the only ones digging deep to return tax reliefs in the near future. The Treasury has recently announced new rules on how and when anyone in dispute over a tax-avoidance scheme has to pay up.

At the moment, says The Mail on Sunday, taxpayers "who claim big tax reliefs through an avoidance scheme hold on to the cash until a court rules against them". This gives avoiders an incentive to drag cases out, particularly when it is clear that in the end the tax will be due.

The new system works the other way around: they will have to pay up as soon as the scheme is disputed. They only get the money back "if the tax tribunal eventually rules in their favour".

This will hit some 12,000 people who have invested in versions of film schemes currently in dispute. Another 16,000 people will face bills as a result of arranging to be paid via loans from offshore firms, as will 8,500 who have tried to avoid paying stamp duty on their homes.

They won't just be paying back the tax either: they'll be paying interest on it too. How much? According to tax adviser Richard Rose in The Mail on Sunday, "for pre-2005 cases, as much as a quarter of the bill could be made up of interest".

Our guess is that the majority of those involved are going to wish they hadpaid their tax bills in the first place.

However, investors in the Oxford VCTs can take some comfort from the fact that the net asset value of their investments has risen over 200% in the last three years so whether they get to keep their tax reliefs or not, they should still salvage something.