The role of VCTs in supporting innovative start-ups and driving economic growth
Venture Capital Trusts (VCTs) are vital sources of funding for early-stage British businesses in need of growth capital. These unique investment vehicles channel the risk-bearing potential of investors into fledgling companies. By bridging the gap between risk-averse capital and risk-intensive innovation, their contribution extends beyond individual business success to fostering broader economic development.
According to the Association of Investment Companies (AIC), VCT fundraising in the 2022/2023 tax year amounted to £1.08 billion – all of which will be invested in young and ambitious UK companies.
“This VCT fundraising is close to record levels which will be highly beneficial to the UK’s innovative small businesses in a challenging year,” Richard Stone, Chief Executive of the AIC, said. “This much-needed support to the UK’s fast-growing companies helps deliver vital economic, social, and environmental advantages to the country. It’s crucial VCTs can continue to fund young businesses which create jobs, develop skills and knowledge, increase exports, and raise the tax take across many sectors including healthcare and technology.”
Why invest into a VCT?
VCTs offer significant tax benefits to incentivise investment. These include income tax relief of 30% on investments up to £200,000 per tax year (provided the shares are held for at least five years), tax-free dividends, and no capital gains tax on the sale of VCT shares. These incentives help offset some of the risk associated with investing in early-stage businesses.
You can read our full guide to VCTs here.
Investments in innovative companies
Examples of investment into innovative businesses include Albion VCT's Quantexa holding, a company that built a data analytics platform to fight financial crime. It was initially invested in when it had 20 employees and less than £1m in revenue. Since then, it has grown to have 650 employees and tens of millions in revenues, becoming a global player with offices around the world.
Another example is Amati AIM's position in AB Dynamics, an AIM listed business that specialises in automatic Driver Assist Systems (ADAS) and is also involved in simulation technology. Its hardware and software are fully oriented towards autonomous vehicle development. Not only is this a profitable business, but it has also benefited from the excitement surrounding AI and is proving a positive contributor to the Amati portfolio, despite overall headwinds in the AIM market.
Meeting the challenges
There are always challenges and risks with growth investment and portfolio companies can fail. For example, ProVen VCT invested into a festival ticketing company called FestTicket. This was badly impacted by the Covid pandemic and had to go into administration. Despite this bad news, ProVen has recently achieved a number of successful exits including the partial exit of Zoovu, an e-commerce branding business, at 5.1x return, and Blis, an advertising technology company, at a 6.7x return.
To mitigate these risks, a good VCT manager will look to own a diversified portfolio across different sectors, with businesses at different stages of maturity. VCT managers often play a large role in working with their investee businesses to further product development, build sales and marketing, and expand overseas.
Don’t forget that, to the best of our knowledge, Chelsea provides the most competitive VCT discounts in the market.
This discount will be given to you in two parts:
- Upfront allocation of additional shares in the VCT.
- One-off upfront trail commission cashback.
To find out more about VCTs, don't hesitate to reach out to the team on 020 7384 7300. We are ready to assist you with any queries you may have.
Important Notice
Please be aware that VCTs are long-term investments. VCTs usually invest in small, unquoted companies and therefore carry a greater risk than many other forms of investment. They are also very illiquid and you may have to hold them for longer than the minimum five-year investment period. In addition, the level of charges is often greater than unit trusts and OEICs. Past performance is not necessarily a guide to the future. The value of investments, and the income from them, can fall as well as rise, due to market and currency fluctuations and you may not get back the amount originally invested. Chelsea Financial Services offers an execution-only service. If you require investment advice you should contact an expert adviser. Tax assumptions are subject to statutory change and the value of tax relief (if any) will depend upon your individual circumstances. Tax relief is restricted to total VCT investments for each investor to £200,000 per tax year and the initial tax relief cannot exceed the amounts which reduced the investor's income tax liability to zero.