Venture Capital Trusts (VCTs) have seen their popularity soar in recent years, with the amount invested rising more than 2.5x over the past decade*. There is now more than £6.3bn invested in the sector, which saw record fund raising during the 2021/2022 tax year**.
“Not only does the government provide powerful incentives to invest in the form of 30% upfront income tax relief on new investments, plus tax-free dividends and tax-exempt capital gains (providing the shares are held for five years), but VCTs have also proved their worth as an investment,” explained Peter Hicks, VCT research analyst at Chelsea Financial Services. “What’s more, if you invest through Chelsea, you’ll also receive an upfront trail commission rebate in addition to our initial charge discounts.”
A recent survey carried out by the Association of Investment Companies (AIC) revealed that the tax breaks are very important to investors with 79% saying they are the primary reason they invest in the vehicles***.
But while the tax incentives are undoubtedly part of the appeal of VCTs, there are other reasons to introduce them into a portfolio. According to Nadia Halila, senior business development manager at Puma Investments, many investors like the idea of investing in small businesses and helping them grow. “By doing so, they are providing an important boost to the UK economy,” she said.
This is backed up by the AIC survey which also showed that the same percentage of respondents (79%) say the growth potential that comes from backing young companies early is another reason they invest**. More than half (55%) of VCT investors cite supporting innovation as a factor and the same number (55%) invest in VCTs to support UK entrepreneurs**.
Ewan MacKinnon, Investment Partner at Maven Capital Partners which manages the Maven VCTs, said: “Earlier stage businesses, of the sort and size backed by VCTs, will typically be run by innovative and ambitious management teams looking to exploit new market opportunities. They do this through the development of new or enhanced products and services, often underpinned by ground-breaking new technologies and ideas which keep the UK at the forefront of global entrepreneurialism and innovation.”
Although the current economic environment is still uncertain there was also general agreement that the possibility of a recession makes supporting smaller UK businesses more important, with more than three-quarters (76%) of respondents agreeing**.
VCTs also act as a strong diversifier to conventional equity and bond portfolios, according to Nadia Halila, “because the investee companies have different dynamics from large FTSE companies.”
“Different VCT providers can also target different sectors and different risk profiles,” she said. “Some will aim to provide high-capital growth but with more risk, while others will target a steady tax-free dividend stream. They will also hold companies at different stages of development.”
According to the AIC survey, most investors in VCTs (60%) are using them to save for their retirement**. The typical VCT investor has 13% of their portfolio invested in these vehicles, which invest in small, young UK companies with high growth potential**.
Most VCT investors surveyed reinvest their tax-free dividends, with 35% reinvesting them in other types of investment and a further 28% ploughing them back into VCTs**.
However, 29% say they spend their tax-free dividends**. While some respondents spend them on luxuries and hobbies, others rely on them for living expenses, with one respondent saying they used the dividends for “fuel bills” and another for “normal day-to-day expenditure”. Several respondents said that the tax-free dividends supplement their retirement income.
If you have not already applied for a VCT this tax year the following are still open:
|VCT||Minimum subscription||Initial charge||Discount||Closing date for 2022/23 tax year|
|Blackfinch Spring VCT||£3,000||5.5%||3% + 1% early bird +1% existing investor||3 April 2023 (3pm)|
|Calculus VCT||£5,000||5%||5%||4 April 2023 (4pm)|
|Foresight WAE Technology Shares||£3,000||5.5%||3% or 3.5% existing investor discount||3 April 2023 (12pm)|
|Maven VCTs||£5,000||5.5%||3%||4 April 2023 (12pm)|
|Pembroke VCT||£5,000||5%||2%||3 April 2023 (1pm)|
|ProVen VCTs||£5,000||5.5%||3%||4 April 2023 (1pm)|
|Puma 13 VCT||£3,000||3%||1% or 2% existing investor discount||5 April 2023 (11am)|
|Seneca Growth Capital VCT||£3,000||5.5%||4.0% or 4.5% for existing investors||4 April 2023 (12pm)|
|Triple Point VCT||£3,000||5.5%||3% or 4% for existing investors||5 April 2023 (12pm)|
To request a prospectus and application form, contact Peter Hicks on 020 7384 7300.
*Source: AIC, 28 February 2023
**Source: AIC, VCT managers still seeing strong investor appetite, 30 January 2023
*** Source: AIC, Majority of investors use them to save for retirement, 20 March 2023. The online survey of 107 investors in VCTs was commissioned by the AIC and conducted by Research in Finance between 23 January 2023 and 3 February 2023. To participate, respondents had to hold VCTs and be self-directed to some extent.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and commentators do not constitute financial advice.