Venture Capital Trusts – Is it an investment opportunity for you to consider?

A Venture Capital Trust is a company which raises money from investors and uses it to invest in the UK’s up and coming companies who are looking for funding. VCTs are attractive to investors because the government, who wants these young businesses to grow, offers some generous tax relief opportunities.

Did someone say Tax Relief?

With buy to let properties becoming ever less tax efficient, interest rates on savings accounts virtually non-existent and many pension pots at their capacity¹, VCTs offer another option for diversification within your investment portfolio. As an investor you would receive up to 30% income-tax relief on your initial investment (that’s £60,000 income-tax relief if you invest the maximum £200,000) and then any dividends received and capital gains on top of that are also tax-free. It’s worth bearing in mind that you have to hold on to your stake in a VCT for a minimum of 5 years, after that you can then take stock (sorry!) and weigh up if you wish to keep your investment within the VCT or you can decide to reinvest the proceeds in another VCT and receive a further 30% income-tax relief or you could have your money back.

What’s the background?

VCTs were introduced in 1995 as a way of encouraging investment into the UK’s entrepreneurial businesses. Some companies that started off with funding from VCTs have become household names (Zoopla, Depop, Gousto) However, it is crucial to remember that many start-ups struggle in their first few years and some will unfortunately not be successful. This is why the tax incentives are so appealing – it’s a form of compensation for the risk you are taking with your money.

According to HMRC, over £8 billion² has been raised in VCT’s since their conception in the 90’s and 20,000 investors have claimed income-tax relief on VCTs in the last year³. Returns from VCTs have been robust despite the impact of Covid-19 on the UK economy⁴. Nick Britton of the Association of Investment Companies⁵ said: “The average return was 4 per cent over the year, which shows more resilience than some of the FTSE 100 companies.” The reason for this is likely to be that the majority of these VCTs are investing in tech companies.

Want to know more?

If investing in burgeoning businesses is appealing and you would like to reduce your income tax bill whilst receiving tax-free income, a VCT portfolio, could be a valuable source of income if you are preparing for retirement or have additional savings with which to diversify your portfolio. As a client of ours we will happily discuss the options available to you, please contact your Independent Financial Adviser to arrange a phone call or meeting.

All the risks associated with this investment are detailed in the product literature for the relevant scheme and should be read carefully. These include but are not limited to;

• The value of an investment, and any income from it, could fall or rise. You may not get back the full amount you invest.
• You cannot offset any losses made on the VCT against other capital gains.
• The availability of various tax reliefs should not cause you to overlook the risks inherent in a Venture Capital Trust.
• Tax treatment depends on your circumstances and may change in the future. Tax reliefs depend on the VCTs maintaining their VCT-qualifying status.
• Investing in smaller companies is considered a high-risk investment. They can fall or rise in value much more sharply than shares in larger, more established companies. They also have a higher rate of failure.
• Past performance is not a reliable indicator of future results, and you should not rely on any forecasts made about future returns. For full performance history, please see product brochure.
• The oversight VCTs take to ensure the companies they invest in are progressing as anticipated, in addition to making sure the VCT continues to comply with legislation, increases the costs of managing the investment. As a result of this the management charges are usually higher than other more mainstream investment solutions.
• The performance of the VCT may lead to a reduction in amount of dividends paid and the possibility these may stop. This would also impact on the total return performance over the investment term.
• Your shares might be difficult to sell. It might take time to find a buyer and you might have to accept a price lower than the Net Asset Value (NAV) of the investment.
• VCT’s are not regulated by the FCA and therefore the normal investor protection arrangements do not apply.  This means that you will have no access to the Financial Services Compensation Scheme (FSCS) should the VCT fail in any of its obligations.
• Unlike some other financial products there is no right to cancel, sometimes referred to as a cooling off notice.

1. The Pensions annual allowance taper has placed limits on how much higher earners can save into their pension.
2. https://www.ftadviser.com/investments/2021/03/12/what-s-driving-investment-into-vcts-post-covid/
3. https://moneyweek.com/investments/funds/investment-trusts/602691/should-you-risk-buying-into-venture-capital-trusts-vcts
4. https://www.ftadviser.com/investments/2021/03/12/what-s-driving-investment-into-vcts-post-covid/
5. https://www.theaic.co.uk/about-the-aic