Investing in Venture Capital Trusts

Posted on: 18 Nov 2022

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As the key Venture Capital Trusts (VCTs) are beginning to announce their 2022/23 fund raises, we look at the rationale for investing.

The amount invested into VCTs has more than doubled over the last ten years (AIC). There are several reasons for this – the plethora of tax incentives, loss of large scale pension contributions for high earners and perhaps most importantly the asset class has really proven it’s worth beyond the tax incentives alone.   As the key Venture Capital Trusts (VCTs) are beginning to announce their 2022/23 fund raises, we look at the rationale for investing.

Let me preface these paragraphs by saying that VCTs are not for everyone, but where appropriate they can offer consistent and valuable tax free capital growth, a healthy tax free income stream and a diverse asset class. For the right investor they are a worthy compliment to ISA and Pension portfolios. 2021/22 saw the highest level of VCT investment ever (£1.13bn in 2021/22 – AIC) which was a 63% increase on the previous year. Many of the most compelling VCTs closed, fully funded, within a matter of hours or days.

The tax benefits of VCTs are –

  • 30% income tax relief on investments up to £200,000 per tax year
  • Tax free capital growth and exit assuming the investments are held for a minimum of 5 years
  • A tax free income stream (dividends)

Common misconceptions suggest VCTs are just another ‘tax scheme’ for the wealthy but that is not the correct narrative. There is certainly a ‘win’ for investors but there is also a clear ‘win’ for the treasury and the wider economic environment. VCTs support economic growth. Banks have withdrawn from supporting small business since the ‘credit crisis’ over 13 years ago and VCTs provide growth capital to enable businesses to scale up and grow. When these businesses expand they employ more people, invest more into their businesses and ultimately pay more taxes – be that income tax for employees, VAT to purchase items or capital gains on exit.

Data from the VCT Association (VCTA) has shown that over the last twelve months VCTA backed businesses (over 90% of the sector) have delivered £12.5bn in revenues, generating £3bn in exports. VCT legislation was also due to end in 04/2025 having been around since 1995 (known as the Sunset Clause) but during the recent Mini Budget the Chancellor outlined commitment to the VCT (and its close comparators) beyond 2025 as part of his economic growth plans.   All Governments have reconfirmed their support to this tax relief in recent years.

A typical VCT investor could be –

  • Directors looking to extract profits from their businesses tax efficiently
  • Young entrepreneurs looking to build tax efficient portfolios from modest beginnings (VCTs have low barriers to entry with £5,000 being the typical minimum investment)
  • Investors looking to create further diversity of asset class in their portfolios
  • Those looking to enhance retirement benefits where investors are at/close to their Lifetime Allowance (tax efficient ceiling on pension values) or have significantly limited annual pension contribution limits (those subject to the tapered annual allowance)

In practice, ideally investors would have utilised the other core tax advantaged investment opportunities including their Individual Savings Account (ISA), pension and have balances in their General Investment Account (GIA) which allow them to benefit from dividend and capital gains tax allowances.  Beyond this, investors will be seeking to bolster these capital silos and enhance long term financial planning opportunities.

As I would always suggest, if this is an area of investment you would like to explore please speak to you adviser who will be happy to help.

If you have young people in your family who you think could benefit from chatting through their finances with someone, please give us a call.  It’s never to young to start and our team are always happy to share their knowledge and experience.

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